This episode explores implied volatility and its impact on option pricing, particularly in scenarios with over 100% implied volatility. Against the backdrop of a discussion on market conditions and individual trades, the hosts delve into the concept of volatility skew, explaining how it asymmetrically affects option values. More significantly, they demonstrate how implied volatility, annualized but adjusted for time to expiration, influences the pricing of options, leading to a skew where out-of-the-money calls are disproportionately valued compared to puts. For instance, the hosts analyze GameStop as a real-world example of this skew, highlighting the significant difference in option prices for calls versus puts at the same distance from the stock price. The discussion then pivots to practical trading strategies, suggesting how to leverage this skew to reduce cost basis and manage risk, particularly in high-volatility situations. Finally, the hosts address listener questions regarding half-day trading effects on theta, the impact of earnings announcements on option pricing, and the use of various option strategies like strangles, iron condors, and ratio spreads.
