MM65 - Implied Volatility Lesson

Today I want to touch on something we have not talked about yet, and I get this question constantly. What is a good price to pay for a LEAP compared to the price of the stock? The answer runs straight through one idea that most newer traders never check before they buy. Implied volatility. This is not financial advice. I am not a trading advisor, and I am not a CPA.

Let's start with stock, because stock is simple. When you buy stock there is no implied volatility. It is dollar for dollar. You buy at 100, it goes to 110, you make 10. It drops to 90, you lose 10. Clean. Options do not work that way. Part of what you pay for an option is volatility, and if you do not know how much, you can overpay badly without ever realizing it.

Here is how I find it. Pull up your DOM and your options chain, and look at Today's Option Statistics. There is a number there called Current IV percentile. That is measuring implied volatility on that specific stock’s options compared to where it traded the rest of the year. If it reads 75, then options are sitting in the top 75 percent of its own volatility range. That is high. This builds right on the intrinsic versus extrinsic value lesson from the Beginner's Guide, Module 7, so if that is fuzzy for you, go back and watch it first.

Now let me show you how different names can be at the very same moment. Micron was at 75 percent, high. Astera Labs was at 85 percent, very high. Tesla was 22 percent, low. MicroStrategy was 27 percent, low. And IBIT was at 7 percent, about as low as it gets. Same market, same day, wildly different volatility. So here is the question I want you to sit with before you ever click buy on a LEAP. If you go out and buy a call on the name sitting at 85 percent, what happens to that option when that volatility does what it always eventually does?