I would love to enter a few options trades but have learned (the hard way) that moves from high to low IV can mess the returns even when calling the right direction of the move. This is explained in more detail here
I want to be able to estimate the extent of the IV crush I'm up against when buying options. I'm looking at three things:
IV of an at-the-money option as it stood on Jan 15th of this year. I assume this is the baseline IV that the stock will trend to as the dust settles on the current market. I'm buying LEAPs so this makes sense as a baseline IV the option with this expiry will revert to (market is not going to stay volatile for 18 months).
IV of an at-the-money option as it stands TODAY. This is the IV at which I'm buying and is the upper limit from which the IV crush will be launched downwards.
Vega of the option I'm buying.
My understanding is that vega will tell me how much my option price will change per 1% change in IV. My question now is, what does "1% change in IV" means. Is it an absolute 1% change, or a 1% change from the start point? In numbers:
- 25% (IV expected to settle at)
- 45% (IV as I bought it today)
Is my IV crush in the ballpark of?
a. (45-25)*(0.3) == $6
b. ((45-25)/45)*(0.3) == $13.32
The option I bought cost me $13.6, so I'm assuming it's (a), but really there's so much craziness going on in the markets right now, it's testing the limits of my understanding, so would really appreciate any help from the community on this one!