It's been a long time since I wrote about the "Options Talk" series. Today, I came up with a topic. I haven't started researching it yet, but I'll share my thoughts with you first. Perhaps before I start, the feedback from everyone can help me complete a more exciting mini-research project.

〖Is the implied volatility of options with 14 days to expiration consistent with the actual stock price volatility that occurs in the following 14 days? Underestimated? Overestimated?〗

People who participate in options trading have a preconceived notion in their minds about the distribution of stock prices 14 days later. This notion determines how they judge the price of that option.

If an options participant believes that stock price volatility will be high, and there is a high probability of breaking through the strike price in 14 days, then they are willing to accept a high market price for the option.

If an options participant believes that stock price volatility will be low, and the probability of the stock price breaking through the strike price in 14 days is very low, multiplying the small probability value by the breakthrough price results in a very small value, then they will price the option at a very low price.

Options traders' judgments about prices often contain an emotional premium. This leads to the actual future 14-day stock price volatility perhaps always being lower than the implied volatility. The portion where "implied volatility" is higher than "actual future 14-day stock price volatility," the excess part, is the emotional premium that investors themselves assign.

What is this premium? Is it positive or negative?

Which stocks have particularly high emotional premiums? Which ones are particularly low?

When are emotional premiums particularly high? When are they particularly low?

#Volatility Risk Premium (VRP)