Options trading has always been a strong interest of mine due to its nature of combining several complex variables into a single pricing model.

Understanding how all of these variables work together to determine options price is key to understanding where advantages can occur.

  • Price of the underlying
  • Strike price
  • Time remaining on the option
  • Risk-free interest rate
  • Dividends on the underlying
  • Implied volatility

If you’ve gone through the Option Strategies Insider course, you’d be familiar with the above pricing factors.  All of them are relatively straightforward except for implied volatility, which is a forward-looking gauge to predict the underlining’s future movement.

The higher the implied volatility, the higher the cost of the options…

Although the probability of predicting stock movement is lower when implied volatility is high, options traders get compensated handsomely for the additional uncertainty, making it an attractive proposition for experienced traders.

Today we have a trade that will take advantage of a slight uptick in implied volatility in a stock that’s been moving relatively sideways for the last two months.

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