Understanding Implied Volatility (IV) for Option Traders: The Ultimate Beginners Guide in 2023
If you’re ready to not get implied volatility (IV) crushed, you’ll need to learn how implied volatility works in order to get to the next level.
I remember when I jumped into an option contract before the company earning report and swinging the trade. It sucked seeing my option premium get crushed first thing during the market opening because I had no idea what implied volatility did.
Use the quick links to jump straight to learn more about implied volatility.
- What is Implied Volatility?
- How Does Implied Volatility (IV) Affect Call and Put Options?
- What is a Good Implied Volatility for Options?
- What is Implied Volatility (IV) Crush?
- How to Screen for Stocks with High Implied Volatility?
If you’re ready to learn more about implied volatility, let’s dive into this!
What is Implied Volatility?
Implied Volatility (IV) is when option buyers & sellers expect a huge change of a stocks future price, as implied by the stock’s option prices.
When option buyers pay more and option sellers demand more, option prices will increase. As option prices increase, implied volatility (IV) increases & the market is predicting larger movements.
When option buyers pay less and option sellers demand less, option prices will decrease. As option prices decrease, implied volatility (IV) decreases & the market is predicting smaller movements.
Implied volatility is almost purely driven by market sentiment.
How Does Implied Volatility (IV) Affect Call and Put Options?
As implied volatility increases the price of the option premium increases, and can have significant impact to the upside or downside on the value of your option premium.
As implied volatility reduces, the value of option premiums drop drastically–causing something know as IV crush.
What is a Good Implied Volatility for Options?
Good implied volatility is anything below 30%. You can typically find stock that are mega cap stocks, and with monthly option contracts.
What is Implied Volatility (IV) Crush?
Implied volatility (IV) crush happens when implied volatility decreases drastically, thus crushing the value of option premiums.
Implied volatility (IV) crush happens often after a wild story emerges for a company and after a company earnings report.
Implied volatility is all about market sentiment, and with that comes a lot of uncertainty. Once certainty settles in such as the valuation of a stock after earnings, option buyers pay less & option sellers demand less at a rapid pace.
Implied volatility (IV) crush doesn’t benefit neither calls or puts.
How to Screen for Stocks with High Implied Volatility?
A screener you may use to find stocks with potential high implied volatility is to use the Webull top gainers. Huge stock gainers will have an unusual amount of volume, and if the stock has option available, then you’ll probably find high implied volatility option contracts.
Markets > Top Gainers > 1 Day
A more friendly approach is to use Finviz screener–it allows you to filter and just find stocks that are optionable.
Here are the Finviz filter configuration you may use:
| Filter | Value |
| Option/Short | Optionable |
| Change | Up 10% or Down 10% |
