The Option Alpha Podcast 7: Why Implied Volatility Is The Key To Your "Edge" Trading Options
24 snips
Nov 13, 2014 The podcast delves into understanding implied volatility in options trading and how it can be crucial to gaining an edge in the market. Using examples like YHOO and HAL, it highlights the importance of trading stocks differently based on their implied volatility percentiles. Buckle up for this intense discussion!
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Use Square-Root Time For Short Moves
- Convert annual IV to shorter-dated expected moves using the square-root-of-time rule instead of linear scaling.
- Check your broker; platforms like thinkorswim often display these per-month expected dollar moves automatically.
Options Price Beats Analyst Targets
- Many sell-side price targets ignore IV-based probability and often imply very low chances of being reached.
- Option market prices already embed collective expectations, making analyst targets less relevant for traders.
Compare IV Using Percentile Or Rank
- Don't judge IV only by its raw percentage; compare IV relative to the stock's own history using IV rank or percentile.
- Use relative IV to decide whether to adopt volatility-selling or volatility-buying strategies.