 Hey everyone welcome to another video lesson from navigation trading comm in this video I want to answer the question when are options expensive and when are options cheap and So I want to take you through a little example of a couple different symbols Just to give you a little bit of perspective and idea of what we're talking about here when it comes to option pricing the amount of time that those options have until expiration and The level of implied volatility are two of the main factors that play into whether the option prices are Actually cheap or expensive But let's take a look at our first ticker example of Netflix and if you're on the trade tab in most Brokerage platforms. I'm looking at thinkorswim at this point You could see that the May monthly implied volatility is twenty nine point eight one percent That's the monthly implied volatility. You could go out to June and see it's about thirty one point six two So those are the different monthly implied volatility levels in Netflix at this time But how do we know if those options are expensive or cheap? Well, what you have to understand is you can't just look at that number and say that that those numbers are Expensive or cheap you have to figure out Relative to what right so relative to another symbol? Relative to itself. What are we comparing those to to understand if those options are expensive or cheap? And so what we like to do is compare those implied volatility numbers Relative to itself Over a period of time and so we look at over the past year is the implied Volatility for example in Netflix cheaper expensive relative to itself So if we look at the chart one of the things that we use to get just a quick snapshot and a visual idea of Options are cheaper expensive is our navigation trading implied volatility indicator. This plots two different lines It's got the IV rank which is plotted in green and the IV percentile which is plotted in yellow So these numbers range anywhere from zero to one hundred. So if one of the lines if one of the implied volatility Numbers is above 50 and we consider that higher implied volatility because it's higher Relative to itself over the past year. Okay, so that's an easy way to do it And that's why we've provided this indicator to our members Because if you're just looking at the numbers and you said okay the implied volatility of Netflix is around 30 Well, what if you looked at another symbol? Let's say XLV which is the healthcare ETF and you look at this and implied volatility in XLV You range is anywhere from 16 to 19. So if you just looked at those numbers You would say well I want to sell premium in Netflix because Netflix has higher monthly implied volatility But let's take a look at the chart of XLV and what you'll notice is is look at the implied volatility Rank in the implied volatility percentile Relative to itself over the last year. You can see implied volatility IV percentile at 76 IV rank at 32. So these are actually much higher Compared to Netflix if you're looking at it relative to itself. So I would much rather be selling premium You know selling iron condors selling iron butterflies selling strangles and straddles in XLV Because the options are more expensive relative to itself Whereas going back to Netflix You can see relative to itself the options are actually very cheap The implied volatility has gone down. It's contracted and so even though the monthly implied volatility is between 28 and 31 Here you've got to look at where they are relative to themselves Okay, and so just to kind of reiterate high implied volatility equals higher option prices Low implied volatility equals lower option prices So we want to sell options when they are more expensive Look for that contraction and implied volatility and that's how we benefit Now does that mean we always want to buy options when implied volatility is low and the answer is absolutely not and Newer traders ask this question a lot because they think it just makes sense If you sell options when implied volatility is high Then you must be able to benefit from buying options when implied volatility is low But that's actually not the case and the reason is is because across the board Fear is overstated uncertainty is overstated meaning options are actually Almost always overpriced So you can actually be profitable selling options when implied volatility is low The difference is your edge is just much smaller. So does that mean we never sell options when implied volatility is low? No, we can still make money when implied volatility is low. We just want to scale down our size a Lot just to compensate for that less of an edge that we have in those options And that's why we want to scale up our positions scale up our overall capital usage when implied volatility is high in That specific symbol relative to itself because that's when we have the greatest probability of making the most money So I hope this was helpful if you have any questions or you want to check out all the other stuff that we're doing at navigation Trading just check us out at navigation trading calm. See you in the next video You