A Brief Word on Options Deemed Having Expensive or Cheap Implied Volatility (IV)

Tom Gentile

Posted in
Education

By: Tom Gentile
February 21st, 2023

3 mins read

You all have seen many articles highlighting the Morning Reports lists in my tools (www.tomsoptiontools.com).  What I want to do real quick here is offer a bit of education for you all that reference these lists so you can have some idea on what strategy one can consider depending on which options list you choose to work from.

Here is a recent image of the top two lists shown on the Morning Reports page.

Figure 1: Recent Morning Reports Lists for Expensive and Cheap IV
Figure 1: Recent Morning Reports Lists for Expensive and Cheap IV

The list on the left is the Expensive IV list and the other is the Cheap Iv list as titled.

Expensive IV means the Implied Volatility (IV) on the options for the security is deemed expensive and when they are expensive that means the price for the options are higher priced than when they are deemed cheap.

The price of an option can fluctuate on their IV even if the stock doesn’t move that much.

A lot of the time an option on  security’s IV increases the closer to an earnings report is due to come out for the security.

As the earnings date nears, the IV can increase and therefor the options for it can increase.  If one were to have bought to open an option early enough, when the IV increases that should pump up the price of the option and as a buyer to open of the trade this could help the premium increase and become potentially profitable.

If the IV decreases, which it tends to do after the earnings report, sometimes referred to as an IV crush – the IV gets crushed and drops a big amount that means the option is decreasing in price and that could hurt the trade if one is still holding those options.

If one buys early enough, say when the IV is Cheap and they do so in advance of an earnings announcement they are not as much risk as one who waited closer to the earnings announcement when the IV has kicked in and the option are deemed expensive.

The Data on the Options Table Shown

Look at the columns in the image shown.  You will see a column titled High IV and Low IV.  This is the range between the highest IV number over a year and the lowest IV number.

If the Current (Curr) IV is closer to the high number of the range it will be on the Expensive List.  If it is near the low number of the range it will be on the Cheap List.

Options Strategy Consideration based on the IV Type

One would want to buy to open options whose IV for the options are deemed Cheap so they can later sell to close when IV increases and pops the premium to a higher value.

For those that know options a bit more than a basic level they know there are selling to open options strategies.

One would want to sell to open an expensive IV option so when the IV decreases one can anticipate buying to close the trade when the option is less expensive and potentially pocket the difference.

Cheap IV Options Strategy consideration

Long Call or Put

Long Call or Put Debit Spread

Expensive IV Options Strategy consideration

Short Call or Put Credit Spreads

There are more option strategies one can consider based on whether the options are deemed Expensive or Cheap, but these few are a good starting point for your education.

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