Understanding Implied Volatility in Options

Medium Option Valuation Implied Volatility

A trader is analyzing the options market for Stock XYZ, which is currently trading at $100. The trader notices that the implied volatility for a call option with a strike price of $100 and a maturity of 6 months is significantly higher than the historical volatility of Stock XYZ. Furthermore, the trader sees that similar call options on stocks in the same sector have lower implied volatilities.

Based on this information, the trader is considering entering a short position on the call option.

What could be a reason the implied volatility of Stock XYZ’s call option is so high compared to its historical volatility?

The market expects significant price movement for Stock XYZ in the future.

There is a lack of interest in trading options on Stock XYZ.

The historical volatility is calculated over a much longer time horizon.

Hint

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