Options Strategies to Consider Based on Short-Term Implied Volatility 

Tom Gentile

Posted in
Technical Analysis

By: Tom Gentile
March 25th, 2022

2 mins read

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):

Charts 03 25 22

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.

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App: Toms Option Tools

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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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