If the implied volatility of a call/put option is 50%. This means the stock can drop/rise 50% in a day?

Answer 1

No.

For options, volatility is the annual standard deviation of the lognormal distribution expresed as an annual percentage of the future stock price.

In terms of how much the stock may move, here is a quote from Sheldon Natenberg's book Option Volatility & Pricing.

"If the underlying contract is a stock trading at $100, then the volatility will have to be based on the forward price of the stock at the end of one year. If interest rates are 8% and the stock pays no dividends, the one-year forward price will be $108. Now a one standard deviation price change is 20% x $108 = $21.60. So one year from now we would expect the same stock to be trading between $86.40 and $129.60 ($108 plus or minus $21.60) approximately 68% of the time, between $64.80 and $151.20 ($108 plus or minus (2 x $21.60)) approximately 95% of the time, and between $43.20 and $172.80 ($108 plus or minus (3 x $21.60)) approximately 99.7% of the time."

Remember, however, implied volatility is essentially a consensus estimate of future volatility by traders of the options. It is the volatility that would make the current option price "fair" and the current price is determined by supply and demand.

Answer 2

Hopefully you're looking at historical and current implied volatility together.

Take a look at ivolatility.com. They show both.

Ok, the historical volatility shows how much the stock can/has deviated over time.

The implied volatility is the market's imputed volatility in the underlying stock based on the current option prices. The higher the IV, the higher the likelihood that the stock will fluctuate a bit. But to answer your question, no, it's not the expected move in a day.

In trading, one typically compares the current IV to the historical IV to determine whether to be a buyer of an option or a seller of one.

The IV is VERY important since you might buy an option, be correct in predicting the direction of a move, and STILL lose money due to buying the option when the IV was high and selling it when the IV was low (perhaps before/after earnings or other news announcement).

Hope that helps!

Answer 3

Volatility is a measurement of the annual standard deviation in the price. So a measured volatility of 50% means the stock has fluctuated 50% over the course of a year on average. Implied volatility means the option is priced to reflect an expected annual 50% price change.

Of course, any stock can go up or down 50% or more in a day, it is just rare. I have seen more volatile stocks move 15-20% in a day.

Answer 4

It means that it can varie up to 50% from the market index. Statistical volatility shows the long term volatility of how much the stocks can varie from the index. Implied volatility shows the short term trend. SV is most of the time greater than IV. If IV goes above SV then market will be very volatile and will be difficult to trade in options at these times.

Answer 5

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