The Importance Of Implied Volatility

Good evening everyone. This is Randy Jacques with tonight’s Free Video. Often, I get asked about implied volatility and how that impacts stocks. There’s a couple different key pieces related to implied volatility and I want to go over those with everyone tonight.

The first piece is the actual volatility of the stock and the second is the relative volatility within the volatilities of that stock. What I mean by that, look at an example of VJET, the volatility of this stock is 105% for December and 103% for January. Now that is a pretty high volatility. If we compare that to another stock that we see here, CPB (Campbell Soup), it’s volatility for January is only around 27% and 30% for December. So, just looking at these two different stocks, one would say, “Wow. VJET is much better because it has a higher implied volatility.” Now in general, that is a true statement as when trading Options and especially selling Options we do want the stock to have a higher overall implied volatility but there’s an important caveat within that. That is, where is this volatility relative to itself? For instance, with VJET, the January volatility is 103% and the December is 105%. Well in the overall range of VJET is that high or low? If VJET typically has volatility at 250% then 100% is very low. Therefore, relative to the options overall in VJET the premium will be low. The same thing with CPB. CPB volatility is 30%. If CPB’s typical volatility is 100% then yes, 30% is very low but if the volatility in CPB is typically 15% then 30% is very high. Again, as an Options trader we want to find those opportunities not just where the stock has high volatility but where it’s volatility within itself is at the high end of its range.

Finding the Current IV Percentile

There is a couple of ways to look at that depending on the platform that you’re on. Now as we mention, you can see the overall volatility, this is Think or Swim, right here (on my charts at 2:38) and they show it for the month. Now, to know where that range is, TOS calls it ‘Current IV Percentile’. What that means is that in the range of the last 52 weeks VJET’s currently implied volatility of 105% is in the 68th percentile. So, what that means, is that on a range of 1-100 it’s in the upper half of its overall volatility over the last 52 weeks. So its volatility is fairly high as opposed to if the Current IV Percentile number was 20% then that would be in the low end of its range.

Looking At Examples of Implied Volatility

Conversely, if we look at CPB we can see that CPB is in the extreme high end of its range. It’s in the 92nd percentile. So, CPB’s implied volatility is at the highest it’s been over the last year. Those of the types of opportunities that we want to look for because you get better premiums when you’re selling options when the IV is high relative to itself. You get high premium for a high volatility stock such as VJET but then within itself you get a better premium when it’s high within its own range.

So if we take another example here, looking at AAPL. AAPL’s implied volatility for December is around 23% but AAPL typical volatility is much higher than that. We can see that AAPL’s implied volatility range is only in the 17th percentile. That makes it harder to trade Options in AAPL as you’re not getting the premium because its volatility is extremely low. That is an important thing to keep in mind as an Options trader. We want to make sure that we’re looking for not just good implied volatility but that a stock has a good IV range and that it’s at the high end of volatility for itself.

I hope everybody has a great evening and we’ll look forward to seeing everyone soon. Take care.

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