Option FAQ

Implied volatility (IV) is a measure of the market's expectations for future volatility in the price of an asset, derived from the pricing of options on that asset. Unlike historical volatility, which looks at past price movements, implied volatility reflects what traders expect going forward.

Implied volatility is critical for options traders because it affects option premiums. High IV typically leads to more expensive options, while low IV results in cheaper ones. Traders can use IV to identify under- or over-priced options and choose strategies accordingly.

Implied Volatility Rank (IVR) compares the current level of IV to its range over a set time period (often 1 year). An IVR of 100% means IV is at its highest point over the year; 0% means it's at the lowest.

Implied Volatility Percentile (IVP) shows the percentage of days over a time period that had an IV lower than the current level. An IVP of 80% means IV has been lower 80% of the time.

American options can be exercised any time before expiration, while European options can only be exercised at expiration.

You are at risk of early assignment if you sell American-style options that are in-the-money, especially around dividend dates for calls or near expiration.

Option theta measures the rate of decline in the value of an option due to the passage of time. It's known as time decay, and it accelerates as expiration approaches.

Option delta measures how much the price of an option is expected to move per $1 change in the underlying asset's price. It also indicates the probability of an option expiring in the money.

Gamma measures how much delta changes when the price of the underlying changes. It's highest when an option is at the money and near expiration.

Vega measures the sensitivity of the option's price to changes in implied volatility. Higher vega means more impact from volatility changes.