The 3Dimensional Trading Breakthrough
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Brian Schad<br />
Implied volatility fluctuates as a rubber band stretches when pulled by an outside<br />
force and retracts when the outside force is relaxed/removed. <strong>The</strong>se outside<br />
forces (in the case of option premiums) are traders, just like you and me, that are<br />
“bidding up” the price of the call options in an up-trending market, or “bidding<br />
up” the price of the put options in a down-trending market. If the premiums<br />
have been “bid up” very significantly when compared to the recent past, this is<br />
known as high implied volatility - an overvalued status. When unknowing and/or<br />
unsuspecting traders buy options in this condition, the odds are highly against<br />
them for realizing a profit.<br />
Example:<br />
PERIOD OF EXTREMELY HIGH OPTION<br />
VOLATILITY / PREMIUMS<br />
UNUSUALLY LOW OPT. VOL. / PREMIUMS<br />
Japanese Yen option premiums reached six year highs on and off for a six month<br />
period. DO NOT BUY options under these extreme conditions. Instead, look to<br />
sell these covered options if/when the implied option volatility of the market<br />
appears to have peaked.<br />
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