Chingo De Dinero

A lot of people talk about options and know the power in the amount of leverage you can get with them.  The one area where most of the people I talk to lack knowledge is how to price stock options.  If I ask if the option is cheap or expensive, the give me the blank look.  If I ask about implied volatility I get an even funnier look.

In short, the price of stock options boils down to implied volatility, which is more or less the probabilities of wide variations in the underlying stocks price.  Using Black-Scholes which is more or less the space under the normal distribution curve that shows the probability at different prices for the underlying stock.  Less volital, the taller, thinner the curve is.  As volitility increases the wider the curve is.  So, as you get an option away from the current stock price, the area under the curve is larger when the volatility is higher.

If you are not familiar with this, I doubt my short explaination will help much, but it should plant some seeds which will make more sense as you research.