Calls and Puts for Income Message Board

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Strategies & Market Trends : Calls and Puts for Income

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To: Jerome who wrote (146)	4/9/2007 11:45:17 AM
From: Ira Player	Read Replies (1) of 5891

Jerome, Implied Volatility (IV) is the amount of volatility that would justify the current price using a model such as Black-Scholes. These models assume the underlying issues will follow a "log Normal" distribution. This is similar to a "Normal" Gaussian or "Bell" distribution, except the distirbution is assymetrical. The "Log Normal" distribution, aproximaitely, makes the chances of going up by say 25%, the same as going down by 20% (1/1.25). In other words, if you lose 20%, you must gain 25% the next time to break even. That's why you need to protect against big losses! When I sell Options, I like to stay with issues that have IV between 0.2 and 0.4. Less and there is not enough premium, more and there is too much risk, but lots of premium. Ira

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