How does volatility impact option prices? Call & Put options price
The higher the volatility of the underlying asset, the higher the price of the options without distinction between call and put.
The rule is that you could try to buy options when volatility is low because you can buy at advantageous prices.
Conversely, options should be sold when volatility is high.
Example – Buy Put Options on Spy ETF:
Etf Spy is an exchange-traded fund, It tracks the S&P 500 stock market index.
When a stock index is rising, generally the volatility decreasing, when the index collapses, volatility rises rapidly.
In November 2018, SPY was at 290,72 and the implied volatility was very low.
We could have bought put options at that precise moment.
It could be a good idea because in the case of falling markets we would be gaining from the movement and the raising of volatility.
In fact, put options increase in value when the underlying goes down.
Furthermore, the increasing volatility would increase the price of the put option purchased.
As you can see, the underlying has collapsed and volatility has increased considerably.
In this case, our bought put would have gained from both movements.
Example 2: Sell Vertical Spread on Spy ETF
We are at the end of November 2018. Following the fall in prices, volatility is very high and the price is in a strong oversell area.
At this point, we could sell a strategy in options of the vertical spread type to gain from a possible decrease in volatility and possibly from a rise in prices, or from the passage of time.
Buying put options as a strategy to protect yourself against market crashes is widely used.
Many investors continue to hold their shares in the portfolio but cover themselves for the risk by paying an insurance policy
which is the price of the put purchased.
If the market continues to rise the maximum loss will be the cost of the option. It must, however, be remembered that
volatility is cyclical and that it is necessary not to choose too short intervals of time.
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