Introducing implied volatility rankings: Learn why implied volatility (IV) matters when options trading.
Using an Options trading strategy can be highly risky, as price movements of underlying assets often determine profits and losses. One of the most critical factors that impact options prices is implied volatility (IV).
In this article, we'll explore why IV is important when options trading and how it may assist traders in making more informed decisions. We're also excited to introduce an insightful new tool designed to help inform your options trading called the IV Ranking feature!
What is implied volatility (IV)?
Implied volatility reflects the market's expectations of how much an underlying asset's price will move over a certain period of time. High IV means investors expect significant price movements of the underlying asset, while low IV indicates less expected volatility.
Volatility, in essence, is the magnitude of price changes of an underlying asset (e.g., a stock). It's usually presented as a percentage.
Higher implied volatility suggests a relatively elevated level of market risk, implying a greater probability of experiencing significant price fluctuations within a specific time frame.
As the potential scope for price oscillations widens, implied volatility increases, leading to higher valuations for options contracts tied to the underlying asset(s), assuming all other factors being constant.
This dynamic arises because, given a predetermined strike price, heightened stock volatility enhances the probability of reaching the strike price, consequently amplifying the probability of an option being exercised if the stock price movement aligns favorably with the option type's direction.
What can implied volatility tell us?
Suppose there is an option with an implied volatility of 40%, and the underlying stock is trading at $100.
It suggests the stock has the potential to trade between $60 and $140 before the option expires.
It suggests the stock has the potential to trade between $60 and $140 before the option expires.
As the market anticipates substantial movements in stock prices, there's a corresponding elevation in implied volatility, typically resulting in an increase in option premiums.
Conversely, when expectations point toward stock price stability, both implied volatility and the option premium will begin to decline.
Volatility tends to rise sharply before major events, such as earnings releases, and the Federal Open Market Committee (FOMC) meetings, with options premiums moving up relative to what's happening in the market. But after these market-moving events are over, volatility generally falls back quickly, driving down premiums.
Hence, we can discern why there are instances when the price of a call option doesn't align with the surge in a stock's value.
Related reading: Historical volatility (HV)
Historical volatility refers to the measurement of the actual past price movements of an asset over a specific period of time.
By comparing an option's implied volatility to the underlying stock's historical volatility, we can determine whether the current implied volatility is reasonable and use this information to determine whether the option is fairly priced or overpriced.
Now you can check implied volatility rankings on moomoo!
Moomoo has recently launched an Total IV ranking feature, helping you track the latest IV rankings and empowering your options trading decisions!
Indicator Explanation
The newly added Total IV ranking reflects the weighted average of the volatility of all option contracts that are 30 days away from expiration on the underlying option chain. This indicator represents the market's expectation of future stock price fluctuations. If the Total IV is high, it means that the market expects a relatively large stock price movement. Conversely, if the Total IV is low, the market expects a relatively small stock price movement.
The newly added Total IV ranking reflects the weighted average of the volatility of all option contracts that are 30 days away from expiration on the underlying option chain. This indicator represents the market's expectation of future stock price fluctuations. If the Total IV is high, it means that the market expects a relatively large stock price movement. Conversely, if the Total IV is low, the market expects a relatively small stock price movement.
To access this new feature follow the steps below:
Step 1: Market - Options tab - stock option>
Step 2: Option Rankings - Total IV
Step 1: Market - Options tab - stock option>
Step 2: Option Rankings - Total IV
In addition, you can also view the trend of implied and historical volatility for individual option chains in the app. Under the option chain you want to view, tap on the analysis button to obtain its volatility and theoretical profit/loss analysis.
Check out this exciting new resource to help inform your options trading using moomoo's new Total IV ranking feature. Open the moomoo app today and take advantage of all the tools and resources available to you!
We're excited to bring this insightful tool to our users and look forward to hearing your thoughts and opinions. Let us know in the comments below how it has helped you make more informed trading decisions!
Want to learn more about option？
Disclaimer
Options trading entails significant risk and is not appropriate for all customers. It is important that investors read Characteristics and Risks of Standardized Options (https://j.us.moomoo.com/00xBBz) before engaging in any options trading strategies. Options transactions are often complex and may involve the potential of losing the entire investment in a relatively short period of time. Certain complex options strategies carry additional risk, including the potential for losses that may exceed the original investment amount.
Supporting documentation for any claims, if applicable, will be furnished upon request.Moomoo does not guarantee favorable investment outcomes. The past performance of a security or financial product does not guarantee future results or returns. Customers should consider their investment objectives and risks carefully before investing in options. Because of the importance of tax considerations to all options transactions, the customer considering options should consult their tax advisor as to how taxes affect the outcome of each options strategy.
This content and the information available within the moomoo app should not be relied upon as a primary basis for any investment decision. Investment decisions should be based on an individual's own goals, time horizon, and tolerance for risk. All investing involves risk, including the potential loss of principal, and there is no guarantee or assurance that the use of any tools, features, or data provided on the moomoo app, or any investment strategy or approach discussed herein will result in investment success or reduce investment risk.
All contents such as comments and links posted or shared by users of the community are the opinion of the respective authors only and do not reflect the opinions, views, or positions of Moomoo Financial Inc., Moomoo Technologies, any affiliates, or any employees of MFI, MTI or its affiliates. Please consult with a qualified financial professional for your personal financial planning and tax situations.Please consider that users will have different risk profiles, financial understanding, financial objectives, investment time horizons and tolerance for potential losses and they should consider these factors when comparing performance, advice or recommendations from other users.
Moomoo is a financial information and trading app offered by Moomoo Technologies Inc.
In the U.S., investment products and services available through the moomoo app are offered by Moomoo Financial Inc., a broker-dealer registered with the U.S. Securities and Exchange Commission (SEC)and a member of Financial Industry Regulatory Authority (FINRA)/Securities Investor Protection Corporation (SIPC).
This presentation is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors. It is provided without respect to individual investors’ financial sophistication, financial situation, investment objectives, investing time horizon, or risk tolerance. You should consider the appropriateness of this information having regard to your relevant personal circumstances before making any investment decisions. Past investment performance does not indicate or guarantee future success. Returns will vary, and all investments carry risks, including loss of principal.
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
Read more
Comment
Sign in to post a comment
Moomoo Community Official Account
"Your options trading partner: Learn and thrive together."
6434Followers
80Following
8926Visitors
Follow
Nick Murphy : K
73766296 : great
StockPickingPoodle : buy n hold poodle not a trader so not interested really not sold any shares in last few years other than couple junk shares given in free sign ups
iSpyderTrader : Awesome news. I can't wait to begin using for my benefits. Thank you.
71604714 : because I never heard of it and I never use before
73652606 : I just started so I'll figure it out soon
Yo_ma trades : I wasn't aware, so I have not used it.
one sjourney home iSpyderTrader : Have you bought it?
71517161 : I want to learn more about option trading
Moo Options Explorer OP 71517161 : Hi mooer, welcome to follow our options community account! We will regularly publish relevant option knowledge. Alternatively, you can also do systematic learning through our option courses via "Discover"-"Learn" in moomoo app.
View more comments...