Use Implied Volatility to make Huge profits
Options with high Implied Volatility (IV) have more option premium and are excellent for option writers or sellers.
IV is relatively simple to understand. It is not easy to predict. But it never stays high for a long time. IV changes as investor sentiment changes and can be very sensitive to the overall market environment. You want to Sell Options with High Implied Volatility because the they have the highest Option Premium.
Implied Volatility versus Historical Volatility
Best way to trade options is to sell option premium. Option Premium differs according to the stock market. There are many different types of volatility, but options traders tend to focus on historical and implied volatility. Historical volatility is the annualized standard deviation of past stock price movements. It measures the daily price changes in the stock over the past year.
In contrast, IV shows what the market “implies” about the stock’s volatility in the future. The higher the IV, the higher the option premium.
But looking at trends and past price action will only tell you what has happened in the past– the historical volatility. We want to know what could happen in the future. We do this by looking at the options market and what the option pricing is implying– hence, implied volatility. There is more chance to win a trade using stock options with high implied volatility. You can find current Implied Volatility from every option in TastyWorks or ThinkorSwim platvorm.
What is Implied Volatility
Implied volatility shows what investors think about future volatility. This means that it reflects what traders “think” about the potential for the underlying stock or index. That information is extremely useful when you can see those changes over time. IV will rise when traders are concerned about risk or are becoming very fearful. Conversely, IV will fall when investors are very confident or bullish. This matters to option traders because an increase in IV causes a rise in option premium. That is good news for option sellers. They prefer to sell options which has a high IV.
IV is one of the most important concepts for options traders who sell option premium. First, it shows how volatile the market might be in the future. Second, IV can help you calculate probability. This is a critical component of options trading. It is helpful when when trying to determine if a stock reaches a specific price by a certain time. Implied volatility does not provide a forecast with respect to market direction. There is no guarantee that these forecasts will be correct.
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