Introducing Implied Volatility Rankings: Why it matters for options trading
One of the most crucial factors impacting options prices, implied volatility (IV) is a measurement that reflects the market’s expectations of how much an underlying security’s price could move over a certain time period.
IV is calculated by using various data points that have been entered into an options pricing model such as Black-Scholes. Many options traders use this measurement to help them with their trading, anticipating likely movements in a stock’s market price.
At moomoo, we take implied volatility analysis a step further for our users with our new total IV rankings (IVR) tool. By using it, investors can see the weighted average of volatility of all stock option contracts 30 days away from expiration on the underlying options chain. Estimating a security’s future movement, implied volatility ranges from 0 to 100. At the 50th percentile, implied volatility is considered sitting in-between high and low points while percentiles closer to 0% mean low volatility; a number closer to 100% is high volatility.
In our IVR tool, users can view volatility in descending order and implied volatility percentage change. This can help assess which options are perceived to have higher risks and lower risks – crucial information for risk management – and assist with making informed options trading decisions.
And keep in mind that implied volatility values, IV Rankings, and IV Percentiles are theoretical estimates, and the actual market conditions may not always align with the theoretical information shown. Therefore, traders should exercise caution and use multiple sources of information when making investment decisions. Past performance does not indicate future results.
Read on to discover how using IVR tool can help options traders with their strategies and learn how to start using it today.
Here are 7 ways using implied volatility ranking can be useful to options traders
In addition to helping assess risk, reviewing and utilizing implied volatility ranking can help you prepare for a trade, and assist you with making potential position changes.
1. Selecting a strategy
Determining a trading strategy can entail decisions and research. Options traders can use the IVR to help them select an appropriate strategy based on their trading goals, depending on high or low implied volatility.
For example, options strategies that may benefit from price swings, like straddles or strangles, could benefit when implied volatility is high. On the other hand, when implied volatility is low, common strategies may include buying calls or puts, long straddles, or using debit spreads.
But first, traders need to know which strategies are aligned with their trading style and goals. Creating a trading plan at the start of your investment journey can help.
2. Evaluating premiums
Deciding whether an option is accurately priced relative to historical levels can help you determine which options you may want to trade. IVR can assist with deciding whether an option may be overpriced or underpriced by looking at its premiums.
An options premium is the market cost of an option, typically increasing as an option gets closer to in the money and declining when options are near expiration or out of the money. Options with higher implied volatility tend to have more expensive premiums, prompting some traders to use short option strategies to potentially take advantage of this. However, options with lower implied volatility are less expensive (all else being equal), potentially leading traders to pursue long options strategies.
3. Gauging risk-reward
Using IVR can provide insights into the risk-reward profile on different options. Investors may use a risk/reward ratio, a measure that compares a potential maximum profit from a trade with the possible loss of the trade. This can help them manage capital and risk of loss by assessing an expected risk and return on a trade.
When reviewing IVR, it can help you obtain insights into the risk-reward profile of different options in an organized, timely fashion. Higher implied volatility typically means higher potential rewards with higher risks and lower implied volatility typically means lower potential rewards and lower risks.
4. Understanding market sentiment
Reviewing IVR can help you gauge whether the market is anticipating calm or turbulent conditions. Evolving conditions can come from news or events that may affect implied volatility. With the IVR tool, it can estimate the potential movement for an asset but not its direction, helping users make potential trading decisions.
5. Analyzing earnings and news events
Using IVR can assist you with identifying options that have spikes, increases, or decreases in volatility, so you can try to position trades accordingly. Unexpected news and earnings reports may affect implied volatility by rising from unexpected stock price moves, such as surprise corporate news like a change in leadership and declining after events like earnings announcements.
6. Anticipating when to enter and exit trades
IVR can help guide you to enter or exit a trade, as timing can play an important factor when trading options. As implied volatility ranges from 0 to 100, a zero percentage can show a stock is currently at its lowest implied volatility level vs when it’s at the highest implied volatility level of 100%. For example, with a pending earnings announcement, a stock’s implied volatility range could move higher and present a potential trading opportunity.
This assessment can be a regular component of your trade management process for executing options trades.
7. Hedging positions
IVR aids in selecting options for hedging purposes. Managing your risk exposure can help limit potential losses. You can choose options with implied volatilities that closely match the risks you intend to hedge against such as a sudden falling price in the underlying security. Implied volatility can help you determine the cost of a potential option to hedge this risk by showing a security’s trends and changes, based on forecasted price projections.
Now that you’ve gained some insight on utilizing IVR, let’s start using it.
How to access Implied Volatility Rankings on moomoo
To begin, you’ll need to go to the Moomoo app’s Markets page.
Go to the Markets page
Click the Options Tab
Go to Top Stocks and click
Under Options Rankings, review Total IV
In addition to viewing implied volatility in the IVR tool, you can also review historical volatility trends for the individual option chains in the app. Historical volatility can help with your trading decisions but it’s different than implied volatility.
Historical volatility is a measure of the fluctuation of past prices for the underlying security over a specific time. It’s calculated by using the variability of prices in the past and how they have deviated over a period of time.
For example, a stock with a historical volatility of 15 is less volatile vs. one with a historical volatility of 40. Note that a stock’s volatility is dynamic so it’s possible to have a historical volatility of 60 in one time period but 20 in another time.
In contrast, implied volatility is forward-looking, estimating the future volatility based on security price changes. Both are important measurements to use and when compared together can help you make trading decisions. Here’s an example.
Let’s say you believe IV and HV will follow one other, but a stock’s IV is lower than its HV. This may suggest IV is understating the stock’s potential price change while an IV higher than HV could potentially suggest the opposite.
By comparing these two, it may help you to understand the amount of expected volatility being priced into options versus how much volatility happens. Typically, a higher IV relative to HV can indicate expensive options while lower IV can imply inexpensive options, all other factors being equal.
Why should you use Implied Volatility Rankings?
Moomoo’s Total IVR helps users view implied volatility by filtering and sorting options based on implied volatility rankings. This makes it easier for traders to identify options with specific volatility characteristics, enables them to potentially participate in more trading opportunities, estimate where the market sentiment for a stock is moving, and make more informed decisions. At moomoo, you can view and utilize this options screening information for free, at your fingertips.
Disclosures:
Options trading entails significant risk and is not appropriate for all customers. It is important that investors read Characteristics and Risks of Standardized Options (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.Keep in mind that implied volatility values, IV Rankings, and IV Percentiles are theoretical estimates, and the actual market conditions may not always align with the theoretical information shown. Therefore, traders should exercise caution and use multiple sources of information when making investment decisions. There is no guarantee or assurance that the use of any tools or data provided on the moomoo app will result in investment success or reduce investment risk.