Preface from Tim: Beloved Sloper Buccaneer was kind enough to answer my “call for content” during my most desperate hour (that is, since I’m traveling) and submitted a huge post which I’ve broken into several parts, not just because it’s so danged big, but also to stretch out the content for my own purposes. Thank you, Bucc! Part 1 is here.
Implied Volatility (IV) and Implied Volatility Rank (IVR)
Implied Volatility (the expected % move in an underlying) is a standardized metric for the general level of options prices for a given underlying. Option prices do not imply a direction regarding the underlying’s movement, they imply only the probable distribution or expected price range of the underlying. For example, SPX has an IV of 20 means that SPX is expected to move within an expected range of 20% for the year. Its option prices will be priced to anticipate a 20% move. When Implied Volatility increases, probability OTM decreases. When Implied Volatility decreases, probability OTM increases. IV is a dynamic figure that changes based on activity in the options marketplace. When IV increases, the price of options will increase as well. When IV is high you should increase your size, and when IV is low you should reduce your size.(more…)