Tastylive: The Most Important Number in Options Trading
As investors and traders alike have increased the use of options, many have entered the space with limited knowledge. Understanding how options work and can be priced can be crucial to making a fortune… or avoiding a loss.
One overlooked concept is that of implied volatility, or IV. That’s because the concept actually covers three different numbers that need to be broken down.
The first, and most followed concept, is the IVx. This looks at a 30-day return on a underlying asset such a stock. It tells investors what a reasonable one-standard deviation move can look like for an asset over the next year.
This is a way of looking at the potential volatility of an option. Option buyers will want to buy when volatility is low. Option sellers will want to sell when volatility is high.
The second key IV number is to look at IVx by expiration date. Since options have different dates, it can give a better sense of the specific risk for a specific trade. Given the rise of weekly, or even daily, options trades, this number can offer a better return than those looking at monthly options.
Finally, there’s the IV of the individual option. That looks at the specific strike price. And it can indicate the potential risk of a certain strike price.