 What's up everyone, Lilo here from smartoptioncell.com. Today is Saturday, February 4th, 2023. Welcome back to another edition of our free options trading YouTube videos. I got a good one for you today. I got lots of people asking me to explain what implied volatility is. What is it? How do I find it? How do I use it? And why is it so important? So this is a good one today. So I want everyone to, you know, stick around and make sure you totally understand what I'm talking about here, because volatility, whether we're talking about implied volatility or historical volatility, it's very important in the pricing of options and how you can use it. And it's one of those kind of elusive subjects that people don't really understand how to use it and how to input it into the options formula. So I'm gonna give you some good ideas on where to find this stuff, how to use it and what it is. So you have a better idea of, you know, how to use it in your options trading. So you'll sit back, relax for the next X amount of time, try to make these things a little bit shorter. But, you know, what you see on your screen right here is the smart option seller guide to implied volatility. This is my cheat sheet here. And that's what we're gonna talk about today. The all about implied volatility and what it is and how to use it. So for those of you who are maybe just starting out or, you know, maybe got some veterans here in the options trading market, volatility is one of the inputs into the option pricing calculator or formula or calculation, I should say that helps give an option its price. Okay, options prices just don't get created out of thin air. You know, if you're ever traded options before you know they all have a price and it's traded per contract like a dollar per contract or 50 cents per contract or $5 per contract. So a lot of people don't understand, well, how does an option get its price? Well, there's a number of things that go into the option pricing formula. And, you know, those things are the price of the stock itself, the strike price, days to expiration, volatility, which we will talk about today. And two lesser things are interest rates and dividends of stocks. Though, you know, those last two don't really play a lot of effect, don't have a lot of effect in the price of an option, but they're still in the formula. There's something that called the Black-Scholes model. The Black-Scholes model is named after the two gentlemen that created the option pricing calculation. So one of those four main things, you got stock price, strike price, days expiration and volatility. All three out of those four very easily found when you're trying to use a calculator, trying to figure out an options price. You always know the stock price. You can always figure out the days to expiration and you know the strike price you're talking about. But volatility is one of those inputs that can confuse people. They're not sure, you know, where to get it, how to calculate it. Should I use a 30-day volatility, a one-day volatility? So basically that's what we're going to talk about today. All right? So implied volatility or IV for short is basically the market's best guess of how volatile a stock is going to be fluctuating going forward, okay? One of the things volatility that gets computed into the option calculation is based on, you know, how do you think the stock is going to move in the future? How volatile, how big is it going to fluctuate high to low? Now volatility isn't trying to figure out is the stock going to move higher or if the stock's going to move lower? Volatility is just all about how erratic the stock is. You know, what are the chances of it moving really big or higher or moving really big lower or moving very little lower or moving very little higher? It's all about the movement. Doesn't matter which direction. So volatility is all about trying to figure out, you know, how is the stock going to perform moving forward in an erratic sense, okay? So that's what implied volatility is. And it's always expressed as a percent, like 30% and most people, most people look at volatility on a 30 day timeframe. You know, most options have, you know, one month options and a lot of people play these shorter one month options. So a 30 day timeframe is a very popular measurement for volatility. And as I said, 30% or 50% or 10%, that's how volatility is expressed. What does that mean? Well, it means the stock at its base price, wherever the stock is trading, that means it can fluctuate 30% higher or lower around that base price within the timeframe in the future. Okay? So in order to use the option calculator properly, you have to input a volatility number. And that's typically implied volatility or some people call it future volatility. What's the future volatility going to be? Now, there's another term called historical volatility. And historical volatility is how volatile or erratic the stock has performed in the past. So these are actual price movements that the stock has made in the past. And you can go back and you look at the past prices and then you can calculate the volatility. That's called historical volatility. That is not a guess. These are things that actually happened. Okay? So historical volatility is all about things that already happened. It's a fact. These are known prices. So you would think intuitively, well, if the stock has traded, when a 30% historical volatility range, then something that can help you make your future volatility guess or your implied volatility guess is how its historical volatility has been fluctuating. So you kind of use that as part of your gauge, historical volatility as part of your gauge for your implied volatility moving forward. Okay? So down here, IV uses HV as a guide for its calculation. If it was 30% historical volatility in the past, then there's a good chance it could be 30% in the future. All right? So there's the historical volatility is just one input that can help you create your own implied volatility or what you think the future volatility will be. Well, what else can go into an implied volatility calculation? Well, right here where my mouse is, implied volatility can take into consideration upcoming events for that stock, that specific stock. Now each stock has its own historical and its own implied volatility levels. Okay? You can't, not all stocks are the same because not all stocks move the same. Some are flat as they move, some are very erratic. So it's going to have different historical and implied volatility levels. So some of the other things that come in to play that help you create this implied volatility amount is the stock having an earnings report coming up. Now you know, excuse me, that an earnings report can really move a stock higher or lower right after the earnings are announced. So in the days leading up to that earnings announcement, stocks could, you know, there's an opportunity for the stock to fluctuate very widely after the announcement comes out. So the volatility level of that stock, the implied volatility level of those options I should say are going to start to go up in the days leading up to the announcement. Why? Because no one knows how the stock's going to react after the announcement. So the market makers, the option market makers will bump up the implied volatility level of the options because they want to protect themselves, right? If the market makers have to give you a bid and offer on that option price, they need to protect themselves against an adverse movement in the stock. So you'll see if you're watching a stock's options a few days before its earnings announcements, you will see that all of a sudden all the option prices, both calls and puts will start to creep up in price. Regardless of where the stock is trading, you'll see the option prices get more expensive because everyone's kind of gearing up for a potential big move in the stock. And so the earnings announcement will have an effect, a government report, like we know the unemployment reports that come out on that first Friday of every month, you'll start to see all stocks, mostly all stocks, their option prices will start to steadily increase up to that Friday because no one knows how the unemployment reports gonna affect stocks. So you'll see option prices start to creep up. And this is all takes into account how the option prices are performing. Implied volatility is you're guessing, of course, where the stock's gonna move in the forward but implied volatility has an effect on the options price. So you'll see the option prices moving. An FDA announcement for healthcare or bio pharmaceutical stock can have their options prices start moving higher in the days before an FDA announcement is going to be forthcoming. And even big world events, the war in Ukraine last February had a big effect on certain stocks and their option prices started to go up. So implied volatility has all these factors that could be used into creating a, what's my guess for how's the stock gonna fluctuate going forward? And all these things could come into play in addition to the historical volatility, all right? So those are some of the things that can affect implied volatility. And you have historical volatility and implied volatility. And how did they work with each other? I'm gonna go show you some charts in a minute here of each one. And but what I wanna talk to you about is that, if you look here where my mouse is, we'll compare a couple of stocks, you can have two stocks that have the same exact stock price. And you would think, well, if stocks are trading at the same price, wouldn't their options prices be the same as well? Both calls and puts. And no, that is not true. Stocks that have the same stock price can have extremely different option prices. And the reason being, if you're looking at the same stock price, the same expiration day, and the same strike price, you would think, well, these option prices have to be the same. But no, the wild card here is the volatility. One stock could have a really high volatility, and one stock could have a really low volatility, and you'll see how the option prices could be completely different. I'll show you some examples there, and I'll show you some websites as well. So where are we here? Now, also two stocks could also have the same implied volatility level. Some people ask me about, well, what about ranking volatility or volatility percentages? What does that mean? And how does that help you? A stock has its volatility over time, and sometimes that volatility can be really high, and sometimes that volatility for that specific stock can be really low. And you wanna know, where is the stock's current volatility based on its one-year range? Is it at the high level of its one-year range, or is that the low level of its one-year range? Or is it right in the middle? In addition, each stock has its own volatility, but it also has its percentage. Where in the zero to 100% range is that stock's volatility falling? Is it currently expensive based on its pass, or is it currently cheap based on its pass? So right here, you can have two stocks that have the same current implied volatility level, but one could be in its low percentile range, and one could be in its high percentile range. And this is very important right here. Don't compare outright IV levels, the current level. Don't compare current levels of one stock to another, because that doesn't help you in any way, shape, or form. You always wanna compare that stock's implied volatility levels to its own past within that same stock. This one, very important right here. Okay, we're gonna show you why that is. All right? How to use IV, when to use IV, that's all based on the options strategy that you're using, okay? If volatility is really, really cheap on a stock, then more options buying strategies would make more sense, because you're buying options when they're cheap. I'm not talking about dollar-wise. I'm talking about volatility-wise. When you hear options players saying, oh, vol is cheap, or volatility is cheap, that means the current volatility for that stock is at the low end of its range. And that means when you buy options, when volatility is cheaper, there's a better chance of being profitable if the stock has a pretty good wild fluctuation. Now, on the flip side, if volatility is really high, options selling strategies could be better used at that time, meaning selling puts, or selling put spreads, or selling call spreads, or selling condors, whatever. Option selling strategies usually work better when volatility is high, and option buying strategies usually work better when volatility is low, based on that percentile list, the ranking list, okay? For me, yes, volatility is important, but for me, it's really the charts that are the most important, how that stock looks on the charts. Is it getting ready to make a move higher, or is it getting ready to make a move lower? So for me, number one is always how the stock looks on the chart, and number two, volatility is very important, okay? So let's start looking at some charts here before we do that. Let's go to, I wanna bring you up to not this one yet, our website, smartoptionsseller.com, because I know we've been talking about put selling the last couple of weeks, and I wanna make sure everyone gets a free copy of our put selling basics ebook. You go to our website, smartoptionsseller.com. This is free, our free put selling basics ebook. Scroll down here, put your name and email address, and we will send you an email, a response email, with a link to get the free ebook, okay? So don't miss out on that. I implore everyone to get a free copy of our put selling basics ebook. All right, let's go back to our little cheat sheet here. Now we're going to look at some charts, we're gonna look at some websites, so you'll be able to become a smarter trader and understand what implied volatility is all about. So let's go first to our, there's two websites I wanna show you, actually three websites. The first one is the optionseducation.org website right here, optionseducation.org, okay? It's called the Options Industry Council and they have lots of great free stuff. So when you get here, click on this little spot right here where it says explore, and it's gonna open up to a new page where they've got all this great free information. They've got all this stuff you can read here, options overview, different strategies, advanced concept. But what I want you to concentrate on today here is this little section right here. This is the free section, well it's all free, but this is the tools that I'd like you to use or you have free access to. Number one is the historical and implied volatility link right here, click on that, okay? Now what it's gonna do is it's gonna bring up a new page here and this is where you can see how volatility is historical and implied for any stock that you choose, okay? Now we're going to look at, defaults to spy the SPY, all right? So we can just use that one for our example sake. Now they give you a little table here, historical volatility and implied volatility. Current, this is where you kind of wanna concentrate. This is where it currently is. Historical and implied volatility right here, this column, okay? But it also tells you it's 52 week high and it's 52 week low. So that forms the basis of the percentile. Where is its current volatility based on its one year range? Now this is one of the best parts right here. Click on this little chart right here and it'll bring up a little bit bigger chart. You can't, it doesn't really get any bigger than this but I'll expand it a little bit. This is a great visual tool. This is a volatility chart. It's not a price chart, okay? This is the spy but this is not a price chart. This is a volatility chart. You can see on the right hand side is the percentages. These are the volatility percentages of the implied and historical. Now the historical is the blue line. You can see the blue line and the implied is the orange line. Now most of the time historical and implied volatility will move in tandem with each other. There are times where they differ. You can see right here historical got really high at 30% but implied was still low around 20%. And that could just mean there was a big event in the past that the historical volatility is starting to show that the spy was fluctuating a lot but the implied saying that it's not gonna fluctuate too much in the future. So the implied volatility was coming down before the historical volatility came down with it. So what you wanna do is you really wanna look at the current volatility, historical and implied right here, this is the most current all the way on the right side of the chart. So you can see they're roughly between 16 and 17%. Both the implied and historical, 16 to 17%. Now is that high or low for the spy? Well, if you just look at the past, you can see currently down here, that's pretty low based on the 52 week high and low areas. The only other time it really got this low was this one time in August and then back in April, end of March, early April last year. So all this other stuff was higher. So currently the spy, the volatility on the spy is currently low. Now if we close this out and we go back to our little table here, you can see that you look at the current, it's roughly, if we look at the 30 day one, the 30 days, it's in the 16 to 17%. Now if you go back to the 52 week high and low, the high was 30 to 31%, the low was almost 15%. So you can see the current vol is very close to the 52 week low. So that means on a percentile basis, the spy is in that very low percentile basis, meaning, hey, if you were gonna buy some options, then buying options would be better at this time because volatility for spy is on the low end of its range. So that's very important to know. Now I wanna show you some other, I wanna compare two stocks that have roughly the same price but have very different volatility levels. Now let's look at a stock like, let's look at a stock, two stocks we're gonna look at is Chewy and Cisco. So we'll type in Chewy here, click on go. Now Chewy, and Chewy's around $48 a share, that this is the price chart. Chewy's around $48 a share. Let's look at the volatility chart. And volatility, let's, whoops, let's see if we can open this up a little more. I wish the chart got bigger, but it really doesn't. So Chewy right now is trading around, 60% implied volatility and historical volatility, you can see right here. It's actually on the lower end of its range based on the past, but 60% and the stock price is roughly $48 as we just saw. And if we compare that to Cisco, remember the volatility is around 60% here with Chewy and its price is around $48. Now Cisco, we type that in, Cisco's price is also around $48 stock price. Well let's look at the volatility level for Cisco. Now you can see here, HV historical is around 17% and implies around 27%. So you can kind of take a little average of that. So maybe 22, 23% if you want to take an average, but compared to Chewy, Chewy's volatility was 60%. Cisco's around mid-20s, but they have the same stock price. So that's where I'm going back from what I said earlier, you would think stocks that have the same stock price, wouldn't the option prices be the same? And it's gonna be no because their volatility levels are different. And let's go to an option calculator and I'll show you exactly how that works. Now also again, the free tools over here, click on options calculator and let's start with Chewy first. Okay, we're gonna put in Chewy and we're gonna look at some of its current options. Now Chewy's $48.73 closed yesterday. Let's look at the front, let's go out a month or so to the March options. Now you can see the volatility's, the good thing about the OIC here is that they give you a volatility level that they know that they use, which falls in line with what we just looked at on the charts. So Chewy's volatility is about 64.25% for the March contracts. We'll click calculate and these at the money strikes, the 48.5 puts and calls are worth, the call's worth 440 per contract and the puts just under $4. So let's just say between the two of them, $4.20, average price put in call, okay? 64% volatility price is 48.73. Let's compare that to Cisco, which has a roughly same stock price. Let's hit on Cisco. Now remember, the calls and puts are around $4. Click on Cisco and you can see roughly the same stock price, 48, it's off by about 10 cents stock price. At the money strike, let's go to March. So we're all using the same things here, same stock price, same expiration, same date, but you can see the volatility is under 21%. And you can see the price of the call and put are $1.50 here, $1.18 here. So with Cisco and Chewy having the same exact stock price, the same expiration date, the same strike price, the options prices are wildly different. Chewy's options were a little over $4, or roughly $4. These are $1.50 to $1.18. And the only reason why that could be different is because of the volatility number, right? So don't get confused. You would think stocks with the same price have to have the same option prices and that's not true because the volatility numbers are very different, okay? So let's go and start to look at options ranking or percentiles. I'll show you two websites you can go to. I want you to go to bar chart.com. Move this over here for a second. I don't know if this is in the way or not or whether you can see, but I am moving something. Bar chart.com, click on the options tab here at the top and then go to IV rank and IV percentile. And let's get rid of this. I don't want that. Now, this is all free stuff as well. If you use free stuff, you're gonna get hit with all these other kinds of advertisements, okay? Just close a lot of those out. So what you'll see here is that you're gonna get a stock IV rank and IV percentile. It's gonna show you stocks that have really high IV or really low IV, okay? Now you got the list here. What you wanna do is you go over to the IV percentile.com and just click on it and it's gonna rank them from the high, I'm gonna do high to low here. So you'll see stocks that have really high, not the absolute number, but where it falls in its 52 week range, okay? Now, something like, and then the thing about bar chart it's only gonna show you the first 20. If you wanna see the rest, you're gonna have to start paying for it, but I'm gonna show you another website as well where you can get a lot more for free. So let's just look at this example here. You have the high IV ranking percentiles, meaning that the current IV level is at the highest for the stock in the last 52 weeks. Something like, and then down here, these are the very low percentiles, so 1%, 2%. So if you compare a stock like Snap, okay? And it's current implied volatility is 64.4%. And if you go up to a stock like Google up here, their IV is only 40%. So you would think, well, Snap would be a better stock to sell options on because it has a higher absolute volatility than Google. 64%, Google's 40%, you think, I'm gonna sell these Snap options because it has a higher volatility. Well, that is the wrong way to go about it because you have to look at the IV percentile. Even though Snap's got a higher volatility level, it's only at the 2% range of its 52 week high and low. So these Snap options are actually cheap on a volatility basis. Not absolute numbers, but on a volatility basis. Now if you go up to Google, the 40% volatility, see this right here says implied volatility, is at the 78% tile. So actually Google's options are more expensive than Snap's based on an IV percentile range. Okay, so you don't wanna confuse the absolute numbers. Don't compare the absolute numbers to two different stocks. You wanna compare the absolute numbers to the stock itself. Okay, Google's 40% is in that 78% range while Snap's is in its very low range. So Snap's options are actually cheap and Google's options are relatively high. So don't get confused there. Make sure you only compare the stocks with itself. Now the other website I wanna show you here is, it's called MarketChameleon.com. I probably talked about this before, MarketChameleon.com has great, great free information. Now if you go to the option implied volatility rankers under here, if you click on the options, you go to the implied volatility rankings, you'll come up with this screen right here. Okay, and it gives you a ton more information. Once again, these are the volatility numbers. Currently the 30 day, this is IV 30, that's based on 30 days. It's a 30 day look back period. So every rolling 30 days you're gonna get, it's gonna compute new numbers. So what you wanna do is here, the IV percentile rank. Click on that and it's gonna rank them. This is low, this is the 0% rank. So these are stocks that are in the lowest percentile ranks over the last 52 weeks, further options implied volatility. So let's click on this one again and we'll go, we'll see what some of these higher ones are. These are all in the 100% range. So these stocks have very, very, very expensive options. And these have, if we click it again, very low, cheap options, cheap volatility basis, not cheap on dollar basis. Just be aware of that. Yes, a Google option might cost $5 and a Snap option might only cost a dollar. But on a volatility basis, those Google options really shouldn't be trading $5. They should be trading maybe three and a half or $4. And the Snap options that are only worth a dollar have traded up to three or $4 in the past. So if you're gonna trade on a volatility basis, you wanna make sure you're buying and selling options based on that IV percentile rank. Okay, very important to do that, all right? So that really can give you an idea of why it's not smart to compare one stock to another, whether that's based on its absolute volatility level or its absolute stock price, okay? Each stock has its own volatility levels and you wanna compare that to the stock itself. All right, so I think that is a pretty good idea of what volatility is all about. Let me scroll back up here, make sure we didn't miss anything. We talked about IV. We talked about HV. We talked about what goes into calculating volatility, how to use it, where to find it, don't compare two stocks to each other. So in your trading, this is just more information for you to understand about how and why options trade in a certain way and how and why they're priced in a certain way. Implied volatility is very important. It's not an exact number. People can calculate them differently. You can use them based on a 30-day look back period, a 60-day look back period. You can use closing prices of the stock. You can use combinations of the high and low of the day of the stock. It's all about how wildly the stock has moved in the past and you're making a guess going forward and that gets reflected into the price of the options because volatility is an input into the option price and calculator. All right, so lastly, let me just show you. For those of you that don't have my book yet, Get Rich With Options, I spend a whole chapter on what volatility is all about. A lot about what I just said here, more graphs and things like that. So I hope this has been helpful to you. Remember, here's a smart option seller guide to implied volatility. If you watch the video here, you'll be able to see the whole thing. So give me a thumbs up in this YouTube video. I hope it's been helpful to you. Leave me a comment, send me an email. I always try to answer. Don't forget to download the free ebook. Let's go back to our website real quick, free ebook. If you want more about what we do, some of our services, we do have some paid newsletters. Our smart option sellers, we sell naked puts, vertical spread trader. We sell put option credit spreads. We have our one-on-one coaching too as well if you need some help getting to that next level. All right, that'll do it for me today. I hope everyone has a great weekend and a great trading week ahead. This is Lee Lowell signing off.