Implied Volatility (IV) Percentile Report

Use Volatility Percentile to enhance your Options Trading

Are you trading options in the right environment?

It is very important to implement an options strategy ONLY if it is the correct environment for that strategy. Traders with a good knowledge of Options Spread strategies now have an additional metric to decide when to implement them.  Introducing Volatility Percentile Reports.
 
BUYING Straddles or Strangles are good neutral strategies but do you know when to BUY them?  The probability of success when BUYING straddles or straddles or maybe even straight Calls or Puts is greatly enhanced IF you buy them when options for that underlying are CHEAP.  If options areEXPENSIVE, you should be looking at SELLING instead of BUYING.  So how do we determine if the Options for an underlying are CHEAP or EXPENSIVEAnswer:  We look at the current Implied Volatility (IV) levels of the options and compare it against the historical IV for the same underlying.

What is Volatility?

Historical or Statistical Volatility (SV) is a measure of how rapid the changes have been in the price of a stock/option over the last X number of days.  When the daily price of a stock or index starts moving more than its normal behavior, its volatility or SV becomes high.

Implied Volatility (IV) is a measure that defines the option market participants’ view of how the stocks would move in the future. If the active participants believe that a particular stock will have violent moves in the future, the IV of the options will be high (i.e. the price of the Options will be higher than their normal pricing).  A typical scenario when we notice a rise in IV (and hence a rise in option price) is when a company is about to announce its earnings.  IVtends to drop sharply right after the earnings announcements.

Unlike a stock which can in one direction continuously for months, IV, typically, moves in a range.  Option IV behaves more like a rubber band. It has the potential to stretch (go high) and compress (go very low) but ends up somewhere near the normal state most of the time during a year.

IV (Implied Volatility) Percentile

At OptionWin, we track and maintain the historical IV data for all optionable stocks and indices.  We have created an indicator, IV Percentile, that allows us to gauge if the current day option prices are expensive or cheap compared to their past historical option prices.  We measure historical option prices over3060 and 180 day period. 

Example: A current day IV(60) Percentile of 97 suggests that the IV of options measured today for the given stock is higher than 97% of the optionIV readings over the last 60 days.  Since IV of options typically returns to its mean, a high IV percentile could be a good environment to WRITE/SELL options or employ strategies that do well in such scenarios.





So how to benefit from IV percentile?

While you should definitely pay attention to any news or events that could affect changes in a stock’s price, there are number of strategies that can benefit from extreme IV readings.  

You should consider buying long term options (2 months or higher expiration) or long Calendar, Straddle and Strangle spreads when IV percentile is extremely low.  As IV moves higher from its low levels, these strategies do well EVEN if the underlying does not move much.

Conversely, when IV percentile is very high compared to its historic levels, you should look at option strategies like Iron Condors, Butterfly and Ratio spreads which will do well when IV starts to come down from its high levels. The Trade Ideas page in OptionWin provides some guidelines on which strategies benefit from IV moving higher or lower.


 Posted  

Comments

  Add Comment
  • 2 years ago

    TATAMOTORS IV(60) is at 23.73 is low & IV(180) is at 12.80 is very much low in this case what should we do either we buy JAN Month call put ?????

     4 people like this.


  • 2 years ago

    can you please through some more light with some practical or Live exmaple so that we could more easily understand this topic

     

    just for  eductional purpose

    thanks in advance 

     2 people like this.

× Disclaimer:

OptionWin makes no investment recommendations and does not provide any financial, tax or legal advice. All the content and tools are provided on the site solely for educational and informational purposes. Any security symbol (Stock, options or futures) shown on the site is for illustrative purposes and not a recommendation to buy or sell. Options trading has inherent risks and is not suitable for all investors. An investor should do their own due diligence before trading.