This segment examines and explains the movement in implied volatility (IV) and why, under certain scenarios, it can mislead traders into thinking there is opportunity when there really is not. All options traders should benefit from watching this.
Chris Butler from our research team joined the boys again to help explain today’s segment. He began by introducing the formula for calculating the expected move in volatility. He showed that by changing different variables, we can understand what drives changes in implied volatility.
Different volatility and price scenarios were examined. Graphs of each were shown and explained. Under certain scenarios volatility rises while prices remain flat because of time decay. When we approach expiration and volatility and the price of the underlying are flat we see a decrease in the option along it’s theta curve.
A chart from October 5th to present of SBUX’s implied volatility versus the expected move into earnings was displayed. The chart showed that although IV rose into earnings option pricing was relatively flat. Another chart using the broader market was also displayed. The chart showed the SPY (S&P 500 ETF) implied volatility (IV) versus the expected move from July 1st to August 12th.
Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista and special guest star Chris Butler from our research team for the takeaways and other important information about changes in implied volatility, what it really means to options pricing and why although volatility almost always increases into an earnings report there is no guaranty that options prices will do the same.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.