6 Dec

How to Strike When the IV Iron’s Hot

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It’s turning out to be a helluva week so far for me and my Weekly Windfalls premium subscribers.

Not only did we win on a bearish credit spread on Lululemon (LULU), we won on a bullish spread on FAANG stock Apple (AAPL)!


And you know how?

Because we harnessed the Power of IV.

No, I’m not talking about a hospital IV, I’m talking about implied volatility.

Knowing an option’s IV and where it stands to “normal” is key in determining whether to pull the trigger on an options trade.

That’s because IV impacts option prices — and just like sellers of any other goods or services, option sellers (like me) want to sell high and buy back lower.

So let’s have a lesson on this critical options term, and I’ll teach you how to score big with “anxiety premium.”

Several factors play into my “hunt” for perfect option trades, and near the top of the list is IV.

But what is implied volatility?

Well, you can almost deduce it by its name: implied, meaning suggested or assumed; and volatility, meaning the ability to change rapidly and unpredictably.

Therefore, implied volatility is essentially the option market’s prediction for stock volatility.

Kind of like how Vegas oddsmakers determine the point spread for a football (or basketball, or mini golf) game. Will it be a high-scoring game, or boring AF?


When the market expects higher volatility from a stock — perhaps ahead of earnings, which can trigger big moves on the charts — options’ IVs, which are expressed as a percentage, will be higher. On the flip side, if the stock is expected to stagnate during the option’s lifetime, IVs will be lower.

High IVs Could Mean Big Bucks for Sellers

Using that same logic, you could also piece together that a stock’s options will be more in demand ahead of a known catalyst, because option buyers need a quick-and-dirty move (and in the right direction) by the shares in order to profit.

And when something is in demand — whether a rare Beanie Baby on eBay or a pre-earnings option contract (I maaay have dated myself w/ one of those references there) — it’s more expensive, right?

Therefore, IV helps determine an option contract’s price. When IV is higher, the option’s premium is higher, and vice versa when IV is lower.

So heading into an earnings report, IVs — and option prices — can climb a hill of “anxiety premium,” because expectations for a big reaction are building. After the event, IVs deflate in a “volatility crush.”


Just like any other goods, you’d rather sell when prices are high, not low, right? So high IVs are great for premium sellers like me, and bad for option buyers on the other side of the trade.

But remember — there will be an eventual depletion in IVs, because they’re mean-reverting. Sellers need to be on the right side of that equation, trying to jump in near extreme highs.

IV Factors

The other things that factor into IV are the time until expiration and the stock’s price.

The more time an option has for the stock to make a big move, the higher that contract’s IV. Therefore, shorter-dated options — like the weekly contracts I trade in Weekly Windfalls — are less susceptible to IV changes.

Meanwhile, the strike/stock relationship also plays a big role.

The prices of out-of-the-money (OTM) and at-the-money (ATM) options — what I trade in Weekly Windfalls — feel fluctuations in IV the hardest, because they’re made up of only time value (half of what determines an options price).

The price of in-the-money (ITM) options — when the stock is already trading above the call strike, or below the put strike — don’t fluctuate as much with IV changes, as their premiums are also largely made of intrinsic value (the other half of what determines an options price).

No matter what, though, traders should be aware of IV fluctuations, which can play a role in determining an option’s price. A negative turn in IV can result in a losing trade, even when you’re right about the stock’s direction.

But Jay, you ask… How do I even tell if implied volatility is high or low?

There are a few ways, actually.


How to Tell If IV is High or Low

Many traders use IV rank to tell if implied volatility is high or low. This measure compares current IV against the highest and lowest IV values of the past year. Specifically, IV rank expresses where current IV sits as a percentage of that distance.

For instance, let’s say a stock’s annual high IV was 60%, and its annual low was 15%, and the option’s current IV sits at 25%. The option’s IV rank is 22.2%, because 25 is 22.2% of the way from between 15 and 60.

IV percentile is another method traders use to gauge implieds. This measure tells you what percentile the current IV ranks among all other IV measures over the past year.

An option’s IV can also be measured against the stock’s historical volatility (HV), which is a measure of how volatile the shares have actually been. For instance, the implied volatility of an option with two weeks to expiration could be compared against the stock’s two-week HV.

IV is considered inflated when it’s running hotter than HV over the same time frame, and considered relatively tame on the flip side.

But remember — IV and HV are relative to that specific stock.

And some stocks are more volatile than others.

For instance, Procter & Gamble (PG) options will have lower HVs than Apple (AAPL), because P&G shares have been less dramatic on the charts. So, what might be considered a high IV against PG’s HV might not necessarily be a high one against AAPL’s HV.


Was Apple the Perfect IV Setup?

Speaking of Apple… let me tell you how I used IV to make nearly $7K on one Weekly Windfalls trade this week.

I started circling Apple amid rumblings the MacPro will be released any day now — an EVENT that could trigger a big move in AAPL stock.

I thought the stock could move back toward all-time highs, and on Thursday, Dec. 4, initiated a bull put spread at the 262.50/260 strikes in the weekly 12/6 options expiring today.

At the time, AAPL was trading around $262.50, so my sold 262.50-strike put was ATM.

The trade was put on for a net credit of 85 cents per spread, or $8,500 total (85 cents x 100 shares per option x 100 spreads), because the sold puts cost more than the puts I purchased. 

That represents the MOST I could’ve made on the spread.

The NEXT DAY, my position was looking good and I took profits of nearly $7,000 on my credit spread.

That means I captured close to 80% OF THE POTENTIAL PROFIT.

And you know what? It looks like I struck while the IV iron was hot.

For instance, the implied volatility on the weekly 12/6 267.50-strike put was 16.66% on Nov. 27. On the day I opened my spread, it had risen to 18.12%.

The day I closed the spread, on Thursday, Dec. 5, IV on that same option had fallen to 17.32%, suggesting I might’ve caught IV at a key turning point and SOLD HIGH.

What are you waiting for? Join me ahead of what I expect will be my best trading year EVER.