I have been trading for some time but IV keeps coming up in discussions. I do not fully grasp its meaning or its significance for traders.
I noticed that some trades did not go well and I am curious if IV played a role in that. Can someone explain how it impacts trades?
Bought AMD puts last week when IV was around 30%. Made decent profit even though stock barely moved down 2%.
IV is short for implied volatility, which reflects how much the market thinks a stock will move. High IV means options are pricier because big moves are expected, while low IV indicates cheaper options. For your trades, buying options at high IV can be a mistake since you’re paying too much. Even if you predict the stock moves correctly, you might still lose if IV drops. The smart move is to buy when IV is low and sell when it’s high. Always consider the IV percentile before entering a trade to avoid losses from situations like this.
Check IV percentile on your platform before entering. Above 50th percentile means expensive options. Below 20th percentile signals cheap options worth buying.
Volatility crush is something that caught me off guard when I started with options. This happens when IV drops after events like earnings announcements.
Think of IV like a premium you pay for uncertainty. Before big news, everyone expects wild price swings so IV shoots up. After the news hits, that uncertainty disappears and IV crashes down.
Timing matters more than direction sometimes. You could be right about which way the stock moves but still lose money if IV collapses faster than the stock moves in your favor.
Made this exact mistake on Tesla options two months ago. Bought calls right before earnings with IV at 85%.
Stock moved up 4% like I predicted but my options still lost 30% because IV dropped to 45% overnight.
Now I check IV rank before every trade. Anything above 70% and I either sell options or wait for IV to cool down.