We do not hold these truths to be self evident, that all IVs are created equal because we know they are not and we explain the differences in this segment explaining the effects of binary events, what IV tells us about market expectations and the differences between months, strikes and more. There is information here that every options trader needs to know.
The formula for calculating the expected move was displayed. It can allow us to know the expected range. Along with IV we need the underlying’s price, and the DTE.
A table of IV type, what is it? and when do we use it? was displayed. The table included strike IV, underlying IV and option chain IV. Tom and Tony noted that we use the IV of the options in total and not the individual strike.
The most common binary event is earnings Tom and Tony explained how this impacts IV levels and can turn the normal relationships between expirations upside down. An example of how earnings shift implied volatilities across different option chains on XYZ stock trading at $100 was displayed. The example included the DTE and IV on both the front month and back month option chains.
A table of underlying IV (30%) and back month IV (35%) of XYZ stock trading at $100 in order to calculate the 1 standard deviation range was displayed. The table included the range percentage and stock range on both. The difference between calculating the 1 standard deviation range for XYZ is small, but may influence strike selection:
An example of the discrepancies in implied volatility and expected moves becoming greater when XYZ (trading at $100 and an IV of 41%) has an impending earnings announcement was displayed. The example compared the days to expiration and implied volatility on both the weekly and monthly options of XYZ stock.
A final table calculating a 1 standard deviation range (3 days) in XYZ stock with an upcoming earnings announcement was displayed. The table included calculating using the weekly IV as well as the underlying IV, the percentage range and the stock range on both. The table showed the impact on IV (your real risk) when a binary event like earnings was upcoming.
Watch this segment of “Options Jive” with Tom Sosnoff and Tony Battista for the takeaways and other insights you need to know about IV to maximize your chances of success and avoid trading pitfalls.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.