If you want to be a successful options trader, you need to understand the concept of implied volatility (IV). Not only does it represent how volatile the market may be in the future, more importantly, it is a critical component to calculating the future value of an option.
Investopedia has a simple explanation of how IV and options relate to one another…
Implied volatility is one of the deciding factors in the pricing of options. Options, which give the buyer the opportunity to buy or sell an asset at a specific price during a pre-determined period of time, have higher premiums with high levels of implied volatility, and vice versa.
Read more: Implied Volatility (IV)
While implied volatility is helpful to know, it is important to remember that since IV is determined by a pricing model, it’s only probability—not certainty. We’ve written a lot about implied volatility strategies in the past, and below you’ll find three killer volatility strategies for taking advantage of both an increase and decrease in IV.
How to Take Advantage of a Volatility Crush
Is the term ‘volatility crush’ music to your ears or the sound of nails on a chalkboard? We’ve got a strategy for some hefty potential profits…if you’re willing to assume unlimited risk.
Check out this post on how to take advantage of a vol crush.
Play an Increase in Implied Volatility Using an Options Calendar Spread
Think implied volatility is likely to rise? Want to put on a position that can potentially profit from an increase in IV? Then a long options calendar spread might make sense.
This shortcut clearly lays out how to use this strategy with a trade example.
How to Use an Iron Condor Strategy For Non-Farm Payrolls Day
The first Friday of the month brings with it one of the most highly anticipated economic reports for the month: the U.S. Department of Labor’s Non-Farm Payrolls report. Implied volatility levels (IV) in bond options tends to rise the closer the report is to being published.
To take advantage of higher IV levels, use an iron condor strategy as outlined in this post.