Alert

Looking for even more trade ideas? Sign up for Alpha Boost, a FREE email from quiet foundation!

Varied Uses of Implied Volatility

Jun 28, 2017

By: Sage Anderson

In options trading, one of the most important data points available to market participants is implied volatility (IV).

Implied volatility is the current market price for volatility - much like the sticker price you'd see on a retail product.

Due to the efficiency of the options market, implied volatility is dynamic and reflects ongoing supply and demand. In this regard, it is constantly providing traders with important market information.

As discussed on a recent episode of Options Jive, traders can use the current level of implied volatility in several important ways, including:

  • Expected move

  • Differentiating expensive and cheap

  • Adjusting notional values for IV

Because options are priced based on expected movement in a stock, the "implied" part of "implied volatility" has real-world application. The slide below, from the aforementioned episode of Options Jive, illustrates how implied volatility can be used to calculate expected move:

As you can see, calculating the expected move using the equation pictured above can be extremely useful for traders as they sanity check potential positions.

Naturally, this leads us to the question, “Is implied volatility priced fairly?” - which brings us to the next important use for implied volatility. Just like that one popular Christmas present invariably gets bid up to insane prices very year, the price of volatility also experiences significant fluctuations in value.

However, in the case of implied volatility, it's easy to see how much a stock has fluctuated over time. Therefore, it's also relatively easy to see how expensive or cheap implied volatility is compared to past movement.

At tastytrade, we use an in-house measurement known as Implied Volatility Rank (IVR) to differentiate whether implied volatility is cheap or expensive. IVR uses the past year of implied volatility data in a specific underlying and reports whether current implied volatility is on the low, fair, or high end of that historical range.

So if stock XYZ had an implied volatility range of 30 to 60 over the past year, and implied volatility is currently trading 45, then the IVR rank for XYZ would be 50%. At tastytrade, we look for opportunities to sell volatility when IVR is above 50%, and look for opportunities to buy implied volatility when IVR is below 50%.

As outlined on Options Jive, the IVR ranking can also help us select specific strategies that match current market conditions.

For the best understanding of this material, we encourage you to watch the complete episode of Options Jive focusing on implied volatility when your schedule allows.

On the show, the hosts also explain the concept of “implied volatility notional value.” You may find this discussion extremely helpful for setting up future trades. IV notional value can help provide perspective on underylings with different stock prices and implied volatilities for comparison purposes.

If you have any questions or comments on implied volatility we hope you’ll reach out at support@tastytrade.com at your convenience!


Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.


Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Related Posts

tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com.

tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”). tastytrade is a trademark/servicemark owned by tastytrade.

Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information on this site should be considered general information and not in any case as a recommendation or advice concerning investment decisions. The reader itself is responsible for the risks associated with an investment decision based on the information stated in this material in light of his or her specific circumstances. The information on this website is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading in derivatives and other financial instruments involves risk, please read the Risk Disclosure Statement for Futures and Options. tastytrade is an investor in Small Exchange, Inc.

© copyright 2013 – 2021 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on tastytrade.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.