Options Trading And Implied Volatility (IV) Rank

Recent Market Correction and Options

The post-pandemic gains have been negated as the accommodative monetary policies are coming to an end. The market has been smacked in the face with several macroeconomic issues via unsustainable inflation, impending interest rate hikes, and geopolitical issues. As such, a third of the Nasdaq 100 stocks are off at least 30% from their highs, half of the S&P 500 has fallen 15% or more, while the median biotech stock has sold off by 60%. Leveraging the Ark Innovation ETF (ARKK) as a proxy for the high-flying growth stocks, this composite is down 60% as well.

This multi-month period of sustained weakness has been accompanied by extreme volatility. With the increase in overall market volatility, implied volatility (IV) and IV Rank become advantageous for option traders as rich premiums can be collected when selling options. This type of extremely volatile environment that we've been faced with recently reinforces why risk-defined options (i.e., put spreads, call spreads, and iron condors) are critical if one chooses to leverage options as a component of an overall portfolio strategy. Risk-defined option trades establish your max losses and allow one to leverage a minimal amount of capital while maximizing returns.

Options and Implied Volatility

The goal of options trading is to sell options and collect premium income in a consistent and high-probability manner. Enabling your portfolio to appreciate steadily month after month without guessing which direction the market will move. The main key for options trading success is leveraging implied volatility and time premium decay to your advantage. Since options premium pricing is largely determined by implied volatility, it's this implied volatility component, when used appropriately, that provides option traders with a statistical edge in trading over the long term (Figure 1). Continue reading "Options Trading And Implied Volatility (IV) Rank"

How Volatility Affects The Options and Binary Options Markets

Market volatility comes in two forms, implied volatility and historical volatility, both which can affect an investor’s ability to be successful in trading Binary Options. Implied volatility is similar to a financial security as it fluctuates with market sentiment and is an estimate of how much options trader perceives a financial security or index will move over a specific period of time on an annualized basis. Historical volatility is the actual past movement of a security and can be defined as the standard deviation of a time series, reflected in percentage format.

Implied volatility affects the price of a Binary Option, but it influences standard vanilla options much more than it effects Binary Options. Implied volatility changes as market sentiment changes. Generally as fear and trepidation increase, implied volatility increases, while increases in complacency are generally highly correlated to declines in implied volatility.  Continue reading "How Volatility Affects The Options and Binary Options Markets"

Volatility- The Essence of Stock Options

Last week Ron Ianieri from OptionUniversity.com came and gave us a great lesson on the misinformed traders out there and how options are a great tool (re-read it here), and today I asked him to teach us a bit about volatility and options! If you've not yet checked out Ron's new online video do it today before it's pulled.


The key to having a trade is that you, being the buyer, and me being the seller, have different volatility assumptions.  What I think volatility is going to be versus what you think volatility is going to be makes the difference.  Everything else we’re in total agreement with because those outputs are “hard numbers” processed by the Options Pricing Model. Current prices, selected strike price, days to expiration, interest rate and dividends are what they are. Just looking at the pricing model output based on these factors is the same for both buyer and seller. But what makes a trade is really the factor of perceived volatility. So, when we talk about volatility we are really talking about the essence of an option trade.

Continue reading "Volatility- The Essence of Stock Options"