Posted in
Technical Analysis
By: Tom Gentile
on March 25th, 2022
Implied Volatility
Part of what makes up the premium of an option is what’s called Implied Volatility.
The definition of Implied Volatility (IV) from Investopedia.com is implied volatility is a metric that captures the market’s view of the likelihood of changes in a given security’s price.
What we see is as is a means to tell if an options price is expensive or inexpensive.
An options IV can be charted and my software www.tomsoptiontools.com does that.
Low or High IV: a Visual
Low 7-30 ATM IV (At the Money IV over a 7–30-day period) on the Invesco QQQ Trust (QQQ):
The upper legend in the above image is the different range of days IV and the percentage (0-100%) it is currently in.
The options are deemed cheap if it is in the lower part of its range and it is deemed expensive if it is in the upper part of its range.
We typically trade options on a 20–30-day time expectancy and often use the 7-30-day IV view.
Some of my options strategies are for a longer time frame expectancy and we can evaluate IV for longer-term time frames as needed.
Strategies to Consider Based on IV
Regardless of what the major indices show for the IV on them as an optionable security, I would advocate for one to evaluate the IV for each security they are considering trading options on.
If IV is low consider Buying Strategies like Long Calls, Call Debit Spread.
If IV is high consider Selling Strategies like Call or Put Credit Spreads
Then when you go to the Morning Report Lists and see Highest Option Volume on Calls or Puts you can check the IV for a security or more on those lists to decide how you wish to trade it, option strategy-wise.
It doesn’t matter if you are trading any strategy with calls or puts the same analysis on IV should be done.
App: Toms Option Tools
Market Insight articles may show images of lists of stocks meeting a variety of options parameters like Unusual Call and or Put activity or Expensive IV found on my app Toms Option Tools.
Other times I will have other charts may work to amplify my educational points.
Those options data lists, however, can be found on my app Tom’s Option Tools. Use your device to search up and download this app and get free access to the Morning Reports section of the app.
Other parts of the app are available at a premium subscription rate, but the Morning Reports Lists are yours free.
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.
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