What is Volatility?
Volatility describes the range of price fluctuations. In options trading, we distinguish between two types:
Historical Volatility (HV)
Measures actual past price fluctuations. It shows how much the price has already fluctuated.
Implied Volatility (IV)
Reflects expected future fluctuations. It is derived from current option prices.
Why is IV so Important?
Implied volatility directly affects option prices. The higher the IV, the more expensive options become – and vice versa.
High IV = Expensive Options
- ▸Market expects strong movements
- ▸Good for option sellers (higher premiums)
- ▸Expensive for option buyers
Low IV = Cheap Options
- ▸Market expects little movement
- ▸Good for option buyers (lower costs)
- ▸Less lucrative for sellers
IV Rank and IV Percentile
To understand whether current IV is high or low, traders use two important metrics:
IV Rank
Shows current IV relative to the 52-week high and low.
Formula:
(IV aktuell - IV min) / (IV max - IV min) × 100
> 50%: High IV
< 50%: Low IV
IV Percentile
Shows how often IV was lower than today in the past 52 weeks.
Example:
IV Percentile = 80% means: IV was lower than currently 80% of the time.
> 75%: Very high IV
< 25%: Very low IV
Trading Strategies Based on IV
At High IV (IV Rank > 50%)
Sell Options
- ▸Write covered calls
- ▸Sell cash-secured puts
- ▸Use credit spreads
Advantage:
You collect high premiums. If IV drops (which often happens), your position gains additionally.
At Low IV (IV Rank < 50%)
Buy Options
- ▸Long calls on bullish outlook
- ▸Long puts on bearish outlook
- ▸Use debit spreads
Advantage:
Options are cheap. If IV rises, you profit twice: through price movement AND IV increase.
Practical Example
Scenario: Tesla Before Earnings
Situation
Tesla releases quarterly results in 2 weeks. IV rises from 40% to 65%.
IV Rank
IV Rank = 85% → IV is very high compared to the year.
Strategy
Sell options (e.g., iron condor) to profit from high IV.
Result: After earnings, IV drops to 45%. You profit from IV crush (Vega) – even if the stock price doesn't move much.
Tools for IV Analysis
Free Tools
- ▸TradingView: IV indicators and charts
- ▸MarketChameleon: IV Rank & Percentile data
- ▸Barchart: Option chains with IV
Premium Platforms
- ▸Libertex: Professional trading tools with IV data
- ▸TastyWorks: Detailed IV analysis
- ▸ThinkOrSwim: Advanced volatility tools
Use IV Data for Better Trades
Start at Libertex and use professional volatility analysis tools!
Start Free NowKey Takeaways
- IV affects option prices: High IV = expensive options, low IV = cheap options
- Use IV Rank: Above 50% = high IV (sell), below 50% = low IV (buy)
- Earnings = IV spike: Before major events IV rises – ideal for selling
- IV mean reversion: Extreme IV values often return to average
Risk Warning: Trading options and leveraged products involves significant risks. High volatility can lead to rapid and large losses. Make sure you fully understand the risks before trading.