Looking at Implied Volatility

Implied Volatility (IV) measures how fast prices are changing on the underlying security. It is so important to pay attention to this factor because if you don’t, you might be wondering why the option you bought is losing value even though the stock is moving in your direction.

When prices move up and down at a fast rate IV is high and therefore option contracts are overvalued. When prices move at a relatively slow rate IV is low and therefore options are undervalued.

You’ll want to look at volatility when placing an option trade because it does play a factor in option value. If you buy an option with high implied volatility you risk it coming down and affecting your option contract in a negative way.

Volatility Indexes

Volatility indexes give you a way to track where volatility is, and where it is going. The three major indexes are the VIX (tracks the S&P), the VXN (tracks the NASDAQ), and the VXD (tracks the Dow Jones).

As the markets calm down and start trending again you will see the VIX slowly make its way down. The VIX can be traded (options only) but it is a very risky way to go.

In addition to these three Volatility Indexes which measures volatility as a whole, there are also smaller indexes for each individual stock. You can track them through IVolatility.com which used to be free for everyone, but now you have to sign up for a free account before you can access the information.

If you are planning on option trading I would use them, they are the only place I know of that gives you this information for free.

Vega

Vega is an option greek that estimates how much IV will affect the price of an option for every 1 percentage point move in the price of the option.

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