Introduction to High IV Options
High IV options are options whose implied volatility (IV) is high relative to the stock's own history or to other options, which means the market is pricing in a larger expected move and the premium is expensive. Buyers of high IV options need a bigger move just to break even, and they lose value if IV falls (for example after earnings). Sellers collect the larger premium but take on the risk of that move. Defined-risk spreads, which buy one option and sell another, reduce how much IV level affects the position.
What are High IV Options?
High IV options are options with a high implied volatility (IV) compared to other options in the same underlying stock. Implied volatility is a measure of the expected volatility of a stock over a certain period of time, and it is derived from the price of options on the stock. Options with high IVs generally have higher premiums than options with low IVs, but they also offer the potential for larger profits if they correctly anticipate market movements.
Hedging and Call Options
High IV options can be used to hedge risk or to speculate, but hedging is more expensive when IV is high. A put option gives the buyer the right, but not the obligation, to sell the underlying stock at the strike price until expiration, so a long put protects a stock position against a drop below the strike. A call option gives the right to buy at the strike price, so a long call hedges a short stock position or a planned purchase against a rise. When IV is high, both puts and calls cost more, which raises the cost of the hedge.
Time Decay and Implied Volatility
High IV options lose value from two separate sources: time decay and falling implied volatility. Time decay (theta) is the decline in an option's time value as expiration approaches, and it accelerates in the final weeks. Separately, if implied volatility drops, for example after an earnings announcement, the premium falls even if the stock does not move (often called IV crush). A buyer of a high IV option can be right on direction and still lose money if the move is smaller than the premium priced in.
Probability of Profit and Risk Management
Probability of profit is the chance that a position finishes beyond its breakeven price at expiration. For an option buyer, that is the strike plus (for calls) or minus (for puts) the premium paid, which is further away when IV is high. The probability of profit is dependent on the underlying stock’s direction and implied volatility. Therefore, when trading high IV options, the trader should incorporate risk management into their strategy to limit their potential losses if the stock moves in the wrong direction.
Bull Spreads and Bear Spreads
Bull spreads and bear spreads are both option strategies used with high IV options. Bull spreads involve buying calls at one strike price and selling calls at a higher strike price in order to limit downside risk. Bear spreads involve buying puts at one strike price and selling puts at a lower strike price in order to limit upside risk. Both strategies allow the trader to define their risk and have a higher probability of making a profit compared to trading outright call or put options.
MarketXLS and its Benefits when Trading High IV Options
MarketXLS is an Excel add-in that returns options data in spreadsheet cells, so you can check whether an option's IV is high before trading it. For example, =ImpliedVolatility30d("AAPL") returns the stock's 30-day implied volatility and =ImpliedVolatilityRank1y("AAPL") shows where that IV sits within its one-year range. =QM_GetOptionChain("AAPL") returns the option chain with implied volatility and Greeks. Options data is real-time on the Advanced and Business plans and end-of-day on the Standard plan.
High IV options price in larger expected moves. Buyers pay more and need a bigger move to profit, sellers collect more premium for taking on that move, and both should account for time decay and changes in implied volatility. This article is educational and is not investment advice.
Search for all templates in the MarketXLS template library.
Relevant blogs that you can read to learn more about the topic
Best Options To Buy (Use Marketxls For Research)
Volatility Surface Chart (It’S Impact On The Profitability Of Option Trades)