announcements, or the release of other news particular to an individual
stock can cause anxiety, or fear, in traders and consequently increase
demand for options that causes IV to rise. IV can fall when there is
complacency in the market or when the anticipated news has been
announced and anxiety wanes. “Buy the rumor, sell the news” is often
reflected in option implied volatility. When there is little fear of market
movement, traders use options to squeeze out more profits—greed.
Arbitrageurs, such as market makers who trade delta neutral—a strategy
that will be discussed further in Chapters 12 and 13—must be relentlessly
conscious of implied volatility. When immediate directional risk is
eliminated from a position, IV becomes the traded commodity. Arbitrageurs
who focus their efforts on trading volatility (colloquially called vol traders )
tend to think about bids and offers in terms of IV. In the mind of a vol
trader, option prices are translated into volatility levels. A trader may look at
a particular option and say it is 30 bid at 31 offer. These values do not
represent the prices of the options but rather the corresponding implied
volatilities. The meaning behind the trader’s remark is that the market is
willing to buy implied volatility at 30 percent and sell it at 31 percent. The
actual prices of the options themselves are much less relevant to this type of
trader.