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Options Trading...It's All About The Implied Volatility! — Transcript · YTtoTranscript

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Options Trading...It's All About The Implied Volatility!

dtoptions · 2,384 words · 12 min read · EN-ORIG

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Below is the complete, readable transcript of Options Trading...It's All About The Implied Volatility! by dtoptions on YouTube. Read the full text, copy any part you need, or generate a transcript for any video with our free tool.

A topic I wanted to revisit was the whole topic of implied volatility and uh implied volatility rank IV rank IVR and how it affects options trading and especially how to use it. Yeah, you know what are we looking for with IVX and IVR. So, if we actually go to the Tasty Trade platform here, and of course, it it'll

depend on what broker you're using. You may or may not even have IV rank available. If you don't have IV rank available on your platform, chances are you have a metric called IV percentile, which is kind of similar. But when you view any kind of stock, let me go to a stock I don't have a position in Google.

Typically, you want the implied volatility of that underlying. What this is is here in Tasty it's IVX that's the actual implied volatility right in Google at the 38 day monthly cycle you can see its implied volatility is 38%. Now what IV tells you it tells you how volatile the stock is right it tells you

how big the stock moves up and down. So um a IV of 20% is a lot less than an IV of 40% for example, right? One's going to move much greater movement, right? So really low IV stocks, banking stocks. Let me just pick uh JP Morgan would be a good one. 38 days and JP Morgan, IVX

27%. Look at a chart of JP Morgan. you know, it it moves around a little bit, but really these uh gaps are $10 gaps here. But something with very big IV, something like coin, Coinbase has a IV rank of the 38 day cycle of 70%. It tends to really move around, right? This

chart looks kind of crazy, right? Crunch it up a little bit, but you know, this thing like this move here, that's a crazy move. It's a gigantic move. It's the same thing. That move there is gigantic. you go back well you get into when it was a much less priced stock but if you zoomed in you would see huge

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moves up and huge moves down and this is could be good for certain strategies could be bad for certain strategies that's why we pay attention to the IV of these stocks now going back to the Google example or any stock pick any stock one of the things we know is that volatility implied volatility when it's

high it tends to come back down to to its mean it's mean reverting um meaning it tends to come back down to its kind of average range where it likes to hang out for various stocks and ETFs. So when I see a IV of 38% in Google, is that at the higher end of its range? Is that at

the lower end of its range? I don't know. Unless I trade Google all the time and pay attention to it all the time and pay attention to the 38day IV of Google all the time. I have no idea if that's a low IV for Google, that's a high IV for Google, if it's the average IV for

Google. And this is why things like IV percentile were created and Tasty created the uh metric IV rank. Actually, the Tasty guys might have invented IV percentile as well, but that was from the Thinker Swim platform when they uh created Thinker Swim. Although I think you can get IV percentile on Tasty as

well, but typically they default to IV rank everywhere, which is fine. What IV rank is, it's a one-year uh they take all of the IV metrics for Google uh monthly IV metrics as far as your 30-day implied volatility, all the 30-day implied volatility readings for the last year, the last 12 months, and then they

give it a uh IV rank from 0 to 100. Where does it fall on that scale? So what it means is that if you have an IV rank of zero, that means that Google's implied volatility right now is the lowest it's been in the last year. If you have a IV rank of 100, that means

Google's implied volatility right now is the highest it's been in the last year. You have IV rank of 50, that means Google's current IV is exactly in the middle of all of the rankings uh for the past year. Now, what's confusing about that to some traders is you would think, well, if the average would be 50, right?

Which it it is that would be the uh right in the middle of the whole range would be a IV rank of 50. Well, wouldn't it make sense to sell options only when IV rank is above 50 and buy options when IV rank is below 50? Well, it's kind of it doesn't quite work that way. get

skewed a little bit because implied volatility typically spends much more time in the lower end of its range than the higher end of its range. And we can see this with VIX. Take a look at the VIX chart here. You can see we spend most of the time down here in the 15 to 20 area in

VIX, right? We get a pops, right? We get like this August 5th event from last year which hurt a lot of people, right? blew up a lot of accounts. But you you get other things like here right toward the end of the year, we got another little pop. There's a nice little pop

and then of course the market meltdown of February and March. Every now and then you get pops, but for the most part you stay down here in this kind of normal range. So you really you're not going to get a lot of opportunities to sell premium to sell options if you wait around for IV ranks of 50 or more

because it's just such a small uh percentage of the time that IV rank will be above 50. So typically the Tasty Trade guys recommend you know IVR of 30 or more to sell premium and that's what I typically stick to as well. uh might go down to if something has an IV rank of 25, I may still sell a

strangle on something, but once it gets below like 25, definitely not. And the reason implied volatility works like this is IV is very peculiar because it tends to stay in what is known as a lull state, you know, where it kind of doesn't do much. You know, it's just hanging out in its normal range and it tends to do that

around 70% of the time. So about around 70% of the time, it's not really expanding in a big way and it's not contracting in a big way either. It's just kind of doing what volatility tends to normally do. About 10% of the time though, you get the ball explosion, right? You get the big increase, you

know, the big increase, the big increase, right? And then about 20% of the time, you get the big ball decrease. And that happens right after the big ball increase, obviously. And I say the decrease happens 20% of the time and the increase happens 10% of the time is because just real world experience, you

know, V explodes a lot quicker than it contracts afterwards. Uh, right? It it takes about twice as long for it to come back down after the big move up. So it's expanding in a big way 10% of the time. It's contracting in a big way 20% of the time and 70% of the time it's not doing

much anything. So, what this means is how often is volatility expanding in a big way? Well, we just said 10% of the time. That means 90% of the time it's either contracting in a big way or it's just not doing anything. It's in that lull state. So, if 90% of the time V is

not expanding, would it be better to be selling options rather than buying options? Well, obviously the answer is yes. Especially if you're employing any kind of uh strategies that have a Vega component. Like if you're trying to profit from volatility, either expanding or contracting, it makes much much more sense to be on the

side of selling options and profiting from the V contraction, which we already said happens twice as often as the V expansion. Remember, 20% of the time versus 10% of the time. And then that 70% of the time we're in a low state. Well, that's fine, too, if you're in short options because you still benefit

from theta, the passage of time. You're typically selling out of the money options, you're fine. Where the person that's long the option, it's getting killed by Theta. That's 70% of the time, and Vega is not really helping them in any way. So, this is part of why selling options works is because of the implied

volatility. But again, this is also the nature of the way volatility expands and contracts is why we typically stick to around the 30 IV rank, right? If it's 30 or above, you're in the kind of higher end of the range. If you're below 30, you're in the lower end of the range. So, that is why especially when I talk

about strangles, especially, you know, I've got to see a IV rank of 30 to sell a strangle. Iron condors as well. got to see a IV rank of 30 to sell a iron condor. It's not even a strategy I would consider if the IV rank is lower than 30. Unless it's part of a campaign trade

thing or you you've just got this product that you, you know, repeatedly do something over and over and over again and it's working for you. I I can understand that. Uh but if you're opportunistic trader looking for opportunity, if I rank is less than 30, then the opportunity is not there. if you're

looking specifically to sell strangles and iron condors. So, I hope some of that made sense. Went on a bit of a rant there, but I know the whole concept of implied volatility is kind of confusing. Implied volatility rank adds even more confusion because IV rank is actually a a way to measure IV. And then what do

you do with the numbers? One of the things that you can do with the numbers though is it helps you find trades. Obviously, if you know selling options, it's better when IV is high. go to a watch list, go to, you know, whatever watch list you want to use and sort by IV. Sort it by high IVR. Um, most of the

high IVR stocks are high IV because earnings could be coming up. So, what you could do is make sure you have the earnings indicator turned on. That way, you can quickly see, hey, this has an IV rank. Like right now, Pepsi. Pepsi is not a great stock because it's actual IV, its IVX is so low, it's most of the

time it's not worth trading. But it's right now it's got a IVR of 71 which is high. Reports earnings in 8 days. I'm going to ignore that because I don't want to go do something in it when I know earnings is next week. But you know this stock here, I don't know what this

is. SOC doesn't matter. Probably wouldn't trade it because liquidity is probably not good. But if it say it was a liquid stock and it did have high IV, now I could see it doesn't report earnings until 35 days. That's plenty of time for me to go, for example, sell a strangle in it and still be out of it

well before earnings potentially, assuming the trade works out. So, you know, sort by IV or IVR to help you find trades. Also, one of the things you need to do, well, here on the left hand side where I've got my positions, my open positions, if you're one of these people that sell a lot of options, especially a

lot of strangles and iron condors, sort by IVR on your positions, too. And anything that has a IV rank of say 20 or less, think about should you be in that position. Anything that is single digits, so under 10, really think about should you be in that position. for me right now. I mean, Apple is 26. Got a

short put in Apple. So, this is more of a directional trade. It is a short options trade. So, I do benefit from I IVR and IV contracting, but because it's one side of the trade and not both, I do have a directional component. So, it's it's never necessarily a bad idea to sell a put on something if you're being

if you're treating it as a directional trade anyway. But, I do like the fact that it still has a IV rank of 26. So, this is good. Uh, ARK is put credit spread 24 IV rank. Hims 48 IV rank, which is great for strangle, right? Selling both sides of the trade. Ion Q,

which we just uh put on a closing order, but it's not filled yet. Uh 42 IV rank, which is good for put credit spread, you know, primarily a short options trade, the put credit spread. So, you know, got good IV ranks, but anything that's really low like spy right now. Now, the spy is one of our campaign trades. We

just put this on all the time regardless of IV rank. But, for example, if I had a strangle on and spy and I notice, wow, spies IV rank is all the way down at 11. Maybe I close it, right? Maybe I get out of it because IV rank has come down so low. Not going to really be able to

squeeze much more out of it as far as Vega. Yeah, it's something to consider, you know, pay attention to the IV ranks.