Calls, puts, and the right to choose
Start with the difference between owning a share and owning a contract.
Read articleVOLATILITY / 5 MIN READ
Implied volatility is a price input
Why the same directional view can lead to very different option outcomes.
Two different views of movement
Realised volatility describes movement that has already occurred, using a stated measurement method and period. Implied volatility is inferred from an option's market price through a pricing model. One looks back; the other is a current price input, not a guarantee of a future range.
Comparisons need a consistent horizon. A one-day realised measure and a three-month implied measure are not automatically comparable.
The event can change the price
Before a scheduled announcement, an option may reflect considerable uncertainty. After the announcement, the underlying can move in the expected direction while implied volatility falls. The combined effect on the option depends on its terms, the size of the move, time remaining and the premium paid.
This is why an options thesis needs more detail than ‘the price will rise’. It also needs a view about the price paid for uncertainty.
A useful practice exercise
Compare two hypothetical positions with the same directional thesis but different expirations. List the events each spans, the liquidity of each contract and the assumptions that would invalidate the comparison. Do this before comparing their premiums.