Understanding what is a good implied volatility for options is crucial in options trading. This article will delve into the importance of determining a suitable implied volatility range. Well address key questions like “Is 30% IV high?” and explore what constitutes a successful IV rate.
Looking to dive into options trading but confused about implied volatility (IV)? You’re not alone. One of the most common questions I get from traders is “what is a good IV to buy options?” – and it’s no wonder why! IV can make or break your options trades but figuring out the “right” level feels like trying to hit a moving target.
In this comprehensive guide, I’ll break down everything you need to know about finding the optimal IV for buying options. We’ll skip the theoretical jargon and focus on practical insights you can actually use in your trading.
Key Takeaways
- There’s no universal “good” IV percentage – the ideal range depends on the specific asset, your strategy, and risk tolerance
- A common guideline suggests 20-25% as a decent IV range, but this varies widely across different stocks and market conditions
- Low IV is generally better for buying options, while high IV is often preferable for selling options
- IV rank (or percentile) is more important than absolute IV value when deciding when to buy options
- Understanding IV’s mean-reverting nature helps predict potential future movements
What Exactly is Implied Volatility?
Before jumping into what makes a “good” IV, let’s get clear on what implied volatility actually is.
Implied volatility represents the market’s expectation of how much a stock’s price might fluctuate in the future. It’s calculated using option pricing models like the Black-Scholes Model which factors in
- Current stock price
- Strike price
- Time until expiration
- Risk-free interest rates
Essentially, IV is baked into option prices – higher IV means more expensive options, lower IV means cheaper options.
Why IV Matters When Buying Options
When you’re buying options, you’re essentially paying a premium for the right to buy or sell a stock at a specific price. This premium is heavily influenced by IV.
If you buy an option when IV is high, you’re paying more for that option. If the IV decreases after your purchase (which it often does following events like earnings announcements), your option will lose value even if the stock price moves in your favor. This phenomenon is called “IV crush” and it’s a common trap for new options buyers.
What’s Considered a Good IV Range?
Here’s where things get interesting – there’s no one-size-fits-all answer to what constitutes a “good” IV for buying options. However, we can establish some general guidelines:
By Absolute Numbers
Some traders consider 20-25% to be a decent IV range for buying options. But this is an oversimplification because:
- Some stocks naturally have higher IVs than others
- Market conditions can drastically shift what’s considered “normal” IV
- Different sectors have different volatility profiles
By IV Rank/Percentile (More Important!)
A much better approach is looking at IV rank or percentile. This compares the current IV to its historical range over a specific period (usually the past year).
For buying options, consider these guidelines:
- IV rank below 30%: Generally favorable for buying options (IV is relatively low)
- IV rank between 30-70%: Neutral zone
- IV rank above 70%: Generally unfavorable for buying options (IV is relatively high)
Two Real Examples: Same IV, Different Scenarios
Let’s look at two stocks with similar IVs around 30%, but very different IV ranks:
Example 1: Qualcomm Inc. (QCOM)
- IV: Approximately 30%
- IV rank: 27.38% (relatively low)
- Interpretation: IV is on the lower side compared to QCOM’s historical volatility
- Strategy implication: Could be favorable for buying options since IV is relatively low
Example 2: ProShares Short VIX Short-Term Futures ETF (SVXY)
- IV: Approximately 30%
- IV rank: 74.60% (relatively high)
- Interpretation: IV is on the higher side compared to SVXY’s historical volatility
- Strategy implication: May be better for selling options rather than buying
This comparison shows why absolute IV values can be misleading. A 30% IV might be low for one stock but high for another!
When is the Best Time to Buy Options Based on IV?
Based on IV considerations, here are the optimal conditions for buying options:
Ideal Conditions
- Low IV rank (below 30%)
- When you expect IV to increase
- Before anticipated volatility-inducing events
- During periods of market calm before potential volatility
Poor Conditions
- High IV rank (above 70%)
- Right before scheduled events like earnings (IV crush risk)
- When you expect volatility to decrease
- During already volatile market periods
How IV Affects Your Options Strategy
The relationship between IV and options strategies is crucial:
| Strategy | Preferred IV Environment | Reasoning |
|---|---|---|
| Buying calls/puts | Low IV | Pay less premium, benefit from potential IV increase |
| Selling covered calls | High IV | Collect more premium, benefit from potential IV decrease |
| Credit spreads | High IV | Higher premium collection, wider breakeven points |
| Debit spreads | Low IV | Cheaper entry, potential IV expansion |
How to Determine if an IV is “Good” for Your Trade
When evaluating if an IV level is good for buying options, consider these factors:
-
Check the IV rank/percentile: Is it below 30%? That’s generally favorable for buying.
-
Compare with historical volatility: If IV is lower than historical volatility, options might be underpriced.
-
Consider upcoming events: Will there be catalysts that might increase volatility?
-
Analyze the options chain: Look for unusual activity or skew patterns.
-
Look at the term structure: Is short-term IV different from long-term? This might indicate expected changes.
Common Mistakes When Evaluating IV for Options Buying
Lots of traders (me included when I started!) make these mistakes:
- Focusing only on absolute IV numbers rather than IV rank
- Ignoring how IV changes after scheduled events
- Not accounting for sector-specific volatility patterns
- Overlooking seasonal volatility trends
- Failing to consider market sentiment alongside IV metrics
Practical Tips for Trading Based on IV
Here’s how I approach trading with IV in mind:
For Buying Options
- I aim for lower IV environments (below 30% IV rank)
- I prefer buying when I expect volatility to increase
- I’m cautious about buying right before known events
- I look for discrepancies between IV and potential catalysts
For Selling Options
- I target higher IV environments (above 70% IV rank)
- I like selling after IV spikes, anticipating mean reversion
- I capitalize on pre-earnings IV expansion by selling premium
- I use IV term structure to identify optimal expiration dates
Tools to Help Evaluate IV for Options Trading
Several tools can help you assess if an IV is good for buying options:
- Options screeners: Tools like Option Samurai let you filter by IV rank
- IV rank indicators: Available on many trading platforms
- IV percentile charts: Visual representations of current IV vs. historical levels
- IV backtesting tools: Show how IV has behaved historically
- Options calculators: Help estimate the impact of IV changes
Final Thoughts: There’s No Perfect IV
After trading options for years, I’ve learned there’s truly no “perfect” IV for buying options that applies universally. The right IV depends on your:
- Trading strategy
- Risk tolerance
- Market outlook
- Time horizon
- Specific underlying asset
Rather than searching for a magic number, focus on understanding how IV fits into your broader trading approach. Look for relative value – is the current IV high or low compared to its typical range for that specific asset?
Remember, successful options trading isn’t about finding some mythical “good IV” – it’s about understanding how IV affects option pricing and incorporating that knowledge into your trading decisions.
Have you found certain IV levels that work well for your trading style? I’d love to hear about your experiences in the comments!
FAQ About Good IV for Buying Options
Is 30% IV high for buying options?
It depends entirely on the stock and its historical IV. For some stocks, 30% might be extremely low, while for others, it could be quite high. Always check the IV rank or percentile rather than focusing on absolute numbers.
What IV rank is best for buying options?
Generally, an IV rank below 30% is considered favorable for buying options, as it indicates relatively low implied volatility compared to the stock’s historical range.
How do I know if IV is too high to buy options?
Look at the IV rank – if it’s above 70%, IV is relatively high for that particular stock. Also, check if there are upcoming events that might cause an IV crush after your purchase.
Should I always avoid buying options when IV is high?
Not necessarily. While low IV is generally better for buying options, there are strategies like buying calendar spreads that can benefit from high IV environments. What matters is whether the IV accurately reflects the potential movement of the stock.
What is a Good Implied Volatility Range?
Determining what is a good implied volatility for options can be challenging, as there isnt a universal rule to define the threshold of low or high implied volatility (IV). This varies significantly across different assets and market conditions.
The question, “What is a good implied volatility range?” doesnt have a definitive answer. However, a general rule often applied in options trading is buying options when IV is perceived as low and selling options when IV is deemed high. But “low” and “high” are relative terms and depend on the historical IV of the asset.
Following a highly anticipated event for a traded company, such as its quarterly earnings report, we often see a strong decline in IV (i.e., an IV Crush). While theres no rule to define how low IV can go after these events, the general consensus on the market is that implied volatility will strongly decline in these cases.
So, while you may wonder, “Is 30% IV high?” or “What is a good IV success rate?” its important to remember these factors are largely dependent on past data and the asset in question. Therefore, what is a good implied volatility for options? As well see, what is considered high implied volatility for options in one scenario may not hold true in another.
Understanding High and Low IV Through Two Examples
In the following section, well be delving into two distinct examples. Despite having the same Implied Volatility (IV), these examples showcase varying IV ranks, bringing forth the importance of context in determining what good IV entails. These examples will illuminate how good IV can have different implications under different scenarios, further emphasizing the importance of understanding the nuances of IV rank in the field of options trading.
Specifically, we will look into Qualcomm Inc. (QCOM) and ProShares Short VIX Short-Term Futures ETF (SVXY).
As you see in the above, were purposely taking two options with similar IVs (close to 30) and very different IV ranks (i.e., lower than 30% for QCOM and higher than 70% for SVXY). This situation will lead us to evaluate two different options trading strategies.