It's been a long time since I last wrote the "Options Talk" series. Today, I came up with a topic. I haven't started researching it yet, but I'll share my idea with everyone first. Perhaps before I begin, 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 subsequent 14 days? Underestimated? Overestimated?〗

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

If an options participant believes stock price volatility will be high, and there's 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 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 a small probability value by the breakthrough price results in a very small value, then they will price the option at a very low level.

Options traders' judgment on price often contains 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 the "implied volatility" is higher than the "actual future 14-day stock price volatility," the excess part, is the emotional premium investors themselves assign.

How much 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)