over the last two weeks, my may 32's pretty much doubled, so I sold. the implied volatility increased from 14.5% to 16.8%, theoretically indicating that I bought for less than fair value, and sold for less than FV, but by a smaller amount less.
one conclusion I have drawn so far, is that a discount to FV is not all that is needed. you also need some conviction that the stock is going to move one way or the other. sideways is bad. wrongways is bad.
however, if you feel strongly about an up or down movement, it is better to buy when the particular option IV is low. conversely, sell when it is high, relative to historic volatility.
Fair value is determined by comparing the implied volatility to the actual volatility, not the change in implied volatility. But if you own an option it is always good news if the implied volatility goes up because you will get more when you sell it. If the implied volatility is less than the actual volatility then the option is considered undervalued. However this is based on probability statistics alone and does not account for news events that could have changed the value of an option for reasons other than volatility.
Fidelity has a great options volatility tool. Click the research tab and select options. In the field below the word “underlying” input the symbol name and hit enter. A new window appears. In the Details header select “IV index”. Next you will see two tables. One gives the implied volatility and the other the historical volatility. The “term” is the time period over which the volatility is calculated so the longer the term the more averaged the result is. Normally I look at the 30 day volatility for recent activity and the 90 day volatility for a longer term average.
I used to buy the Hoadley excel add on and it would do a similar calculation but this is free so this is how I get my volatility information now.
Currently the implied volatility of AGNC is lower than the actual volatilities so the options are undervalued based on statistical data alone.
Keep in mind that the change in the stock price due to the dividend is compensated for when they do the volatility calculation. In other words they lower the stock price before the exdivy date to make it look like the dividend never occurred before they calculate the volatility. I personally verified this. I used the volatility formula and yahoo historical prices and could only get agreement with these numbers if I did this myself. Once I used the numbers where the exdivy was subtracted out I got exact agreement. So I know that this is the case.
which is why I chose an option expiry that did not include an ex date. I also get that the stock price volatility could decrease to approach the implied value, in which case the options would still be at "fair" value, but with out the gain.
still looking for a way to play price moves in both directions. so far all I have is a general guideline. if you are going to buy or sell an option, make sure the volatility difference is going to help you. or at least not hurt you.