Tom and Tony discuss when to use the different IVs. Understanding when to use different IVs is essential for a trader’s perception of future price action.
We take a look at four different IV types:
- Each option in chain has its own IV
- We almost never use it
- IV quoted for the underlying
- Used as a good approximation for forward looking movement
Option Chain IV:
- Volatility quoted for that specific expiration
- Used especially around upcoming news events (e.g. earnings)
- Metric defining where IV stands relative to itself over the past year
- Used for trade selection (e.g. selling premium with high IVR)
After data crunching, we find monthly moves are calculated using the underlying IV, and if there are earnings announcements, the weekly option chain IV is the better choice.
For more information on implementing the various Implied Volatility calculations into your trade entry and management, tune into the segment.