Implied Volatility

woodsfog_cmp_rndWhy implied volatility matters

As an option seller I look for stocks with high volatility since more extrinsic value is included in the price. Additionally, I establish intelligent diversification of my portfolio through uncorrelated underlying.

With thousands of different stocks from which to choose, how do I use these metrics to identify and differentiate trades? Let’s look at the numbers.

Higher volatility increases the breakevens:

Screen Shot 2015-12-06 at 11.24.04 PM

Higher volatility, for the same strikes, can also increase our credits received:

Screen Shot 2015-12-06 at 11.24.16 PM.png

How does IVR differ from IV?

Implied volatility rank (IVR) is a metric derived from IV and gives a sense of where, in the past year’s range, current IV is trading. For example, the S&P 500:

Screen Shot 2015-12-06 at 11.28.05 PM

Screen Shot 2015-12-06 at 11.29.26 PM.png

 

-Navigation-