VAY™ (Volatility Adjusted Yield) shows option sellers if they're getting paid enough—by comparing option premium to the underlying's realized volatility.
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The Indicator
VAY™ tells you whether an option's premium is expensive or cheap compared to the past. It compares the yield of the 30-day at-the-money option to the stock's 30-day realized volatility, giving you a single number that shows how well you're being compensated for the risk you're taking.
A high VAY™ means the premium is rich relative to the stock's movement in the last 30 days — ideal for sellers. A low VAY™ means you're not getting paid enough for the risk — a signal to look elsewhere or consider buying.
Premium is low relative to volatility. Poor risk/reward for sellers.
Premium is roughly in line with the stock's movement. Proceed with caution.
Premium is rich relative to volatility. Favorable for sellers.
Community
Follow @defineyourrisk for trade ideas, VAY™ breakdowns, and tips on using volatility to your advantage.