Can you explain the relationship between implied volatility and option value?

Essentially, implied volatility and option value are the same thing. This relationship is something we hope Volcube is good at teaching. It is excellent training in Level 1 to look at the price level (in $) you traded and then work out the implied volatility equivalent. For example, if the atm calls are worth $3.15 with 25% vol and they have 12 vega, then selling at $3.21 is equivalent to selling at 25.5% imp vol. You can make this comparison for every trade or order you do and see. The same idea works with strategies; selling a call spread with 2 vega, 1 cent above value would be equivalent to selling the atm calls at $3.21; both prices are ‘half a vol’ above the theoretical value. By making this calculation, you can track implied vol in the market and keep your prices and trading consistent. Remember that if you sell at $3.21, it does not necessarily mean the market value is $3.21, because hopefully the broker is paying slightly above the market value (to give you some edge as a market maker).

 

 

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