When it comes to the world of stocks, there are a number of universally accepted measures for determining whether a specific stock is "overpriced" or "underpriced." When it comes to options, though, it's harder to tell if you really got a "good deal" on an option. Options guru Pete Stolcers provides a comprehensive answer to that question, arguing that there are two primary ways to determine whether you got a good deal:

(1) Compare the implied volatility of the option to the historic volatility of the stock. Generally speaking, "if the implied volatility is low relative to the stock's historical price movement, you are getting a good deal."

(2) Compare the current implied volatility of the option to the historic implied volatility of the options. "If you are buying options when the implied volatility is near the low end of the range, you are getting a good deal." On the other hand, "selling options that are trading near the high end of the 52-week implied volatility range is a dangerous proposition."

The two insights, when taken together, lead to the inevitable conclusion: that understanding "implied volatility" is one of the most important things that you can do as an options trader. As Pete points out, the market makers know when news is about to be released, and will adjust the implied volatility accordingly. Any change in uncertainty about the underlying stock will be quickly translated into a new implied volatility for the option. To illustrate these ideas about implied volatility, Pete provides a number of real and hypothetical trading examples.

DISCLAIMER: Please keep in mind that TradeKing does not specifically endorse any of the securities or trading strategies mentioned. Depending on your risk-reward profile, this trade may or may not be suitable for your portfolio.