Question

Explain (in no more than 3 sentences) why we, for example, tend to use put options for X ≤ $228.82 to back-out the IV(implied volatility), but for X > $228.82, we use the call options. For your information, the last traded price for Tesla Inc. on 25 July 2019 was $228.82.

Answer 1

Implied Volatility is the markets forecast for the likely change in the securities price. It is a metric used by investors to estimate future fluctuations (volatility) of a security's price.

Put options are used when we feel that the price of the security is going to fall in near future, so we sell at high price and we buy when the price is lower at the later stage, so in this case it is expected that the price will fall below 228.82, so we use put option to sell at 228.82 and buy when the price fall, thus gaining from the price difference.

And in case of Call options we feel that the price of the security is going to increase in near future, so we buy at low price and we sell when the price is higher at the later stage, so in this case it is expected that the price will rise above 228.82,; i.e X> 228.82 so we use call option to buy at 228.82 and sell when the price rise, thus gaining from the price difference.

So using Implied volatility metric it can be forecasted whether the price of the security will rise or fall and then call or put option can be used.