Unit 2 · Level 1 · Pricing intuition
IV: the price of movement
In League 5 of the Trading course you met implied volatility (volatility as 'the fifth asset'). Options are where IV lives: it's the size of future movement baked into today's premium. High IV = the market expects big swings, so movement is expensive to buy. Low IV = calm expected, movement is on sale. Note what IV never tells you: which direction.
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What you get asked
High implied volatility means options are…
IV is a forecast embedded in the price, not a promise. It tells you what movement costs to buy, not whether the movement will show up.
Match each IV situation to its consequence.
You can profit from IV itself, not just the stock: buy movement cheap, sell it dear. That's a volatility trade.
IV is a forecast of the size of future moves, not their ___.
A stock with 60% IV is expected to swing hard, up or down; IV doesn't care. Direction is delta's department.
The stock rose, yet your call lost value. Likeliest culprit?
A call is long the stock AND long volatility. If IV deflates faster than the stock climbs, the premium can shrink despite being 'right'.
When is buying movement most attractive?
Same rule as any market: buy what's cheap relative to what you think it's worth. If you expect more movement than the premium prices in, movement is on sale. 🐜
The rest of this unit
Intrinsic, extrinsic, theta and IV: what a premium is really made of.