Options Implied Volatility : Expensive or Cheap and an Option Strategies to Consider for Each

Options Implied Volatility is a key component of an option premium and there are two kinds I look for: expensive or cheap.

Finding options of either variety is one thing and my software www.tomsoptiontools.com can find those for you.

But once you find them what to do with them is the next thing to address and this article will show you an options strategy for consideration once you have found stocks with expensive or cheap options IV.

I look up a listing of Options with both Expensive and Cheap IV. Each one can be used in different options strategies. I will educate you on which strategies for which IV classification so you can then focus on what I feel is the appropriate strategy or strategies to consider when you find an option in one camp or the other.

An options Implied Volatility or IV is a key component of an options price.

IV reflects the market’s expectations of the underlying asset’s price fluctuations over the life of the option.

Let me say this – higher IV generally leads to higher option prices. This is because there is a greater likelihood of significant price movements increases the potential for profit. Contrast that to a low or cheap IV, which usually results in lower option prices. Those options with low IV are usually just that, because there is a low expectation that the price of the underlying will fluctuate that much, if at all. This tends to lend to lesser priced or lesser cost premiums, but not always the case.

Options with Expensive IV are ones I tend to use when I want to Sell-to-Open the option.

Sell-to-Open Cash Secured (Naked) Put Options

I want to consider selling the higher priced option premium when IV is high, because that means I can collect a larger premium when I sell them. I also want to sell very short-term options, meaning they expire real soon. This way my money isn’t tied up for long.

And the type of option I like to sell is ‘put’ options.

You see, a lot of brokerages will allow this only if you have enough money in your account to cover the cost of purchasing the stock if you are assigned. This is what is know as a cash secured Put.

Naked means ‘don’t own it.’ When I sell a ‘naked put’ option,  I don’t own the underlying asset, but I am giving the market the right to ‘put’ me to the underlying (let’s just use stock for the rest of the article). I am giving the market the right to ‘put’ me to stock or make m buy the stock at the specific strike price option.

So long as the stock stays above the strike price I sold-to-open the markets should not assign/make me buy the stock and I keep the full premium sold.

EXAMPLE: I sell-to-open 1 contract of Intel Corporation, (NASDAQ: INTC) February 14, 2025,  $20 Put for $1.00. This would generate $1.00 or $100 into my account. I can’t do anything with that money yet as I am now obligated to buy the stock if the market ‘puts’ it to me.

Should the ‘close’ of the market on the 14th come and go with INTC trading above the $20 strike price the market (no one) will want to put the stock to me at the lower than market price of $20 and three for the option should expire. If/ when it does I keep the $100 and look for another trade.

If (anytime before) or at the close of market on the 14th INTC is lower than the $20 strike price the market can assign me, ‘put’ me to the stock, or make me buy it at the $20 strike.

KEY NOTE: Do not sell-to-open naked puts unless you don’t mind owning the stock. Because it could happen. If you don’t ever want to own the stock don’t do this strategy.

But if you are good with owning the stock and it gets put to you that should be looked as a ‘all good’ situation.

I consider it all good if I am assigned the stock. I look at it like this. I end up owning the stock at a potentially lower price than that $20 strike. If I sold the option for $1.00 or generated $100 and I get ‘put’ the stock, I own it at a basis of $19, ($20 strike less the $2.00 premium sold-to-open = $19).

I can now wait to sell the stock when it goes higher or even consider doing the covered call strategy now on these shares to generate more income and further reduce my basis.

Options with Cheap IV are ones I tend to use when I want to Execute a Calendar Spread

Time Spread aka Calendar Spread

This is a strategy using two option on the same order ticket. It is where one uses the same stock, same strike price, but the options have two different expiration dates: a longer-term one and a shorter-term one.

My goal in doing a Time Spread or as it is commonly called, a Calendar Spread  is to profit from the passage of time.

This happens when the option sold (shorter-term – shorter of the two options in this strategy) decays faster than the option bought (long-term or the longer-term one).

A low or cheap IV helps ascertain the stock should maintain a stable price or at least not move around too much over the life of the trade.

One way to make money in a Calendar Spread

This strategy takes time and patience.

EXAMPLE: Buy-to-Open an Intel Corporation (NASDAQ: INTC) March $20 Put and Sell-to-Open a February 14 $20 Put for a net debit (cost) of $0.68

If INTC is a bit above $20 at Feb expiry I am not likely to get Put to stock and I keep the premium sold. I still have the March, but the cost of the March put of $1.69 is offset by the $1.00 I took in from selling the Feb Put.

I can look to now do it again, sell-to-open the March $20 Put trying for another $1.00.

If the same things happens where the Stock is slightly above $20 the ‘sold put’ expires (along with the March now), but I would have then taken in $2.00 worth of premium over the past two months against a one-time purchase of $1.68 making an overall profit for going through this.

The key is having a stock that doesn’t mov around too much if at all and a way to see if a stock has that characteristic is to find one with low or cheap IV.

My software finds Expensive and Cheap Options IV to help aid in the process of finding stock to execute options strategies appropriate for the type of IV of the stock.

App: Toms Option Tools

Toms Option Tools scan the markets for bullish and bearish trade opportunities using our proprietary scans and strategy algorithms. TTR Darknet finds bullish entries based on triple stack channel collisions. Money Calendar identifies seasonal patterns with at least 90% accuracy looking back 10 years. Weekly Cash Clock finds short term opportunities that last a week on average. Microcurrency Trader applies Darknet technology and moving averages to cryptocurrencies. Velocity Trader utilizes volume spike and Velocity indicators on custom stock lists. Quantum Scripts scans the markets for momentum acceleration signals and employs Quantum noise filters. Optimal Trader finds directional pre-earnings opportunities that are optimized for entry date, stock movement, and volatility surge. My Trades tracks the profit/loss of your trades, displays stock charts and risk graphs, creates new trades, and edits existing trades. Morning Report provides top 10 option rankings in 6 categories each day.

Disclaimers

Stock and options trading has large potential rewards, but also large potential risk.

You must be aware of the risks and be willing to accept them in order to invest in the stock and options market. Do not trade with money you cannot afford to lose.

This is neither an offer to buy/sell/ or recommend a particular stock or option.

Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been actually executed, the results may have under or overcompensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with hindsight.

No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.

Disclaimer of Warranties and Liabilities Tom Gentile and TomsTradingRoom, LLC including employees, consultants, and editors (“Publisher”) cannot and do not warrant the completeness or accuracy of the content found in our areas, or its usefulness for any particular purpose.

Tom Gentile and TomsTradingRoom, LLC also make no promises that our content or the service itself will be delivered to you uninterrupted, timely, secure, or error-free. Under no circumstances will Tom Gentile and TomsTradingRoom, LLC be liable for direct, indirect, incidental, or any other type of damages resulting from your use or downloading of any content on our site.

This includes, but is in no way limited to, loss or injury caused in whole or in part by our negligence or by anything beyond our control in creating or delivering any portion of Tom Gentile and TomsTradingRoom, LLC.

You are agreeing that you bear responsibility for your own investment research and investment decisions. You also agree that Tom Gentile and TomsTradingRoom, LLC will not be liable for any I, investment decision made, or action taken by you, or others based upon reliance on news, information, or any other material published by Tom Gentile and TomsTradingRoom, LLC.

Tom Gentile and TomsTradingRoom, LLC relies on various sources of information that we believe to be accurate and reliable. However, we make no claims or representations as to the accuracy, completeness, or truth of any material contained on our site.

Tom Gentile and TomsTradingRoom, LLC are educational portals, providing content for educational and informational purposes only. Neither Tom Gentile nor TomsTradingRoom, LLC are a broker/dealer. Investors need a broker to trade stocks and options and must meet certain requirements. All securities, futures, and investments data and ideas are offered to self-directed investors. All prices in USD unless noted otherwise.

A full disclaimer can be found here:  http://www.tomgentile.com/legal_disclaimers.html.