VOLATILITY

PART 3: VOLATILITY ANALYSIS

 VOLATILITY ANALYSIS
• Understanding how to properly analyze Volatility is highly important

• Are the premiums more expensive or cheaper than usual?

• Trading options and strategy selection is revolved around Volatility

• Helps determining strategy around earnings

• Implied volatility, Historical Volatility & IV Percentile

 VOLATILITY ANALYSIS
• IV Percentile

• Using IV & HV to Gauge Volatility Movement

• IV Rush and Crush

• IV Mean Reversion
 VOLATILITY ANALYSIS
IV Chart

• Displays Implied Volatility Movement: Yearly and Intra-day Changes

• Displays in decimal format

• 0.3156 reading would convert into: 0.3156 x100 = 31.56%

VOLATILITY ANALYSIS
IV Chart
 IV PERCENTILE

• Percentage of days in the past that a stocks IV was Lower than current IV

• Measures IV by its Past values of 52-week

• Ranking between 0-100%

IV PERCENTILE
 IV PERCENTILE
Number of trading days below current IV
Formula:
252 (Total trading days)

Example: Stock ABC has IV of 45. 195 of the past 252

days stocks IV has been Below 45%

195
IV PERCENTILE: = 0.7738 ( 77.38%)
252
 IV PERCENTILE

• High IV percentile means the IV is usually lower. Good time to SELL options

• Low IV percentile means the IV may spike. Good time to go long

• 100% IV percentile does not mean IV won’t go above its current value

• IV Percentile provides an insight on IV reversion to MEAN

 IV PERCENTILE

• Highly important when swing trading Options

• 0-50% - Go Long ( Buy Options)

• 50-75% - Be careful as IV could revert to mean and crush premium

• 75%+ Consider selling premiums opposed to buying

 IV RUSH & CRUSH
• Volatility rises before anticipated news, earnings, FDA approval of a drug or another

major catalyst

• More uncertainty - More demand- Higher the Volatility rises

• Once the event takes place ,Volatility gets crushed

• IV can drop 10-20 points or more in minutes

• Has a drastic effect on premium

 IV RUSH & CRUSH

• Base strategies on the IV rush and exit before the expected catalyst takes place

• Sell options to collect premium based on the IV crush

• Strategies: Straddles & strangles before earnings

UNDERSTANDING PREMIUMS
 UNDERSTANDING PREMIUMS
Flipping Premiums Basics

• Buying contracts with the anticipation of the value increasing

• Sellers profit from time decay and IV crush

• Buyers profit from volatile move in their favor

 UNDERSTANDING PREMIUMS
Breakdown of Premium Chart
Option ticker symbol

• Gives visual representation of how

Theoretical
option price
and at what point the premiums
Strike price
chart
have been affected overtime

Volume for
that strike
UNDERSTANDING PREMIUMS
Option Ticker Symbol Breakdown

Example: .AMZN201009C3500
Underlying Expiration Strike price
date

Call or put
 UNDERSTANDING PREMIUMS
Strike Selection
• Check the IV (Is there a catalyst that can potentially affect it?)

• If you are bullish on an underlying, trade calls or vertical call spreads

• If you are bearish on an underlying, trade puts or put spreads

• Higher volume (at least 1000)

• Higher open interest (at least 1000)

• Higher gamma is better for scalping

 UNDERSTANDING PREMIUMS
Premium Selection Monday vs Friday

Monday: Friday:

• Premiums are more expensive • Cheaper premiums

• Higher delta • Higher theta: premiums are more sensitive

• Lower gamma so premiums aren't as to time decay

accelerated • Higher gamma results in acceleration of

• Further OTM for some stocks premiums

• IV crush
 UNDERSTANDING PREMIUMS
Weekly vs Monthly Expiration

• Any optionable security will have monthly options but not necessarily weekly options

• Weekly options expire on any Friday that's not the 3rd Friday of the month

• Monthly options expire on 3rd Friday of any given month

• Weekly options provide more flexibility

• Monthlies have more volume, therefore more liquidity

 UNDERSTANDING PREMIUMS
0 DTE (0 Days To Expiration)

• Cheaper premiums

• More risk, as the underlying has less time to recover in case of a pullback

• Higher theta: premiums are more sensitive to time decay

• Higher gamma: accelerated premiums

 DAY TRADING

• At-The-Money • Strike volume 300+

• 2 week out expiration • Open interest 300+

• Delta: 0.3+ • Time frame: 1h/15min/5min trend

• Gamma: the higher the better confirmation

• Bid/Ask spread not more than 0.1 • 1min/3min entry/exit

 SCALPING
• High quantity contracts, short period of
hold time
• In and out quickly
• At-the-money
• Higher Delta is a +
• Gamma: the higher the better
• High volume/OI (1000+)
• Must be liquid
• Requires tape reading
• Time frame: 1min/3min/5min
• High probability setups:
⚬ Rejection at resistance level (tape
confirmation)
⚬ Break of VWAP, strong volume, tape
increase in transactions
 SWING TRADING
• Out-the-Money • Closer to expiration we want increase

• Strike price must be with-in Range of MMM/IV of iv for higher premium

number • Strike Volume: 300-500 range

• Moderate delta 0.2-0.4 • Open interest: 300+

• Low gamma • Time frame: 1d(3y/1y) key levels

• Iv below 30% • 4h & 1h for confirmations of key levels

 SWING TRADING: LEAPS
• Long term equity anticipation securities

• Anticipation of a stock making a huge move in the coming months/year

• Low theta

• Higher premium

• Best to look for low IV stocks

• Benefit from growth of large cap companies without owning shares

 ROLLING CONTRACTS

• Rolling is a way to adjust your option contract to a later date

• Change to new expiration/strike or long/short position

• Rolling may end up causing a compounding in losses