In the real estate market you’ll come across homes of all shapes and sizes. 

So how can you tell if the house up for sale is being offered at a good price or not?

You need something to compare it to. 

And for most real estate professionals, that means looking at the average price per square foot for that specific neighborhood. 

So if the average house per sale in one neighborhood is $400 per square foot, and you see a house that is selling for $300 per square foot, we can say that the house is relatively cheap. 

We do something similar when comparing options. 

But instead of using price per square foot, we’re looking at options implied volatility. 

Implied volatility (IV) in options trading is similar to the price per square foot in real estate. It's a way to compare the relative "expensiveness" of options across different stocks or even different options on the same stock.

What Is Implied Volatility

Implied volatility is essentially a measure of the market's expectation of how much the price of the underlying asset (like a stock) might move in the future. 

It's called "implied" because it's derived from the current market price of the option. Just as real estate professionals use price per square foot to gauge if a house is a good deal, traders use implied volatility to assess if an option is overpriced or underpriced. 

A higher implied volatility usually suggests that the option is more expensive, much like a higher price per square foot in real estate. 

Conversely, lower implied volatility typically indicates a cheaper option. This metric helps traders understand the market's perception of potential future price movements. 

If the implied volatility is high, it suggests that the market expects significant price swings, while low implied volatility indicates expectations of more stable prices. 

By comparing the implied volatility of an option to similar options or historical patterns, traders can make more informed decisions about whether an option presents a good value, much like how a savvy homebuyer might use price per square foot to spot a bargain in the real estate market.

Which Of These Semiconductor Stocks Is More Expensive

Nvidia 

Nvidia is currently trading at implied volatility of 51%. 

Implied volatility is an annualized number, to give you a better idea of what 51% means we can convert it to daily terms. To do that we simply divide 51% by the square root of 252 (the number of trading days in a year).

You get the number 3.2%. 

So based on the implied volatility of 51%, we can expect Nvidia to move 3.2% per trading session. 

AMD

AMD has an implied volatility of 55.6%, which according to the options market is a more volatile stock than Nvidia. 

At its current implied volatility we can expect AMD to move 3.5% per session. 

SMCI

SMCI is currently trading at implied volatility of 90.3%. 

That’s significantly higher than Nvidia and AMD. Heck, it’s even higher than Tesla which is trading at an implied volatility of 69.9%. 

At its current implied volatility we can expect SMCI to move 5.7%. 

How Does This Make You A Better Trader?

• You’ll be able to position size more accurately

• Manage risk more effectively

• Structure trades more efficiently 

To your success,

Don Kaufman