In the Black-Scholes option pricing model, the only variable that is
not directly observable is the volatility of the stock. In practice, an
implied volatility is often calculated. To do this, we take all of the
observable variables including the option price, plug them into
Black-Scholes, and solve for the standard deviation that gives us the
current option price. Doind this calculation directly is not possible.
You must use trial and error, or a computer program.
As
you can imagine, when company specific news is expected in the future,
the implied volatility rises. One announcement that can cause a large
swing in the stock price is earnings. It is fairly common for the
implied volatility to rise when a company's earnings announcement draws
near. In this video,
Dan Passarelli discusses the implied volatility of HP's options near
the company's earnings announcement, as well as option trading
strategies for HP stock. Note, the option trading strategies he
discusses are fairly advanced.
