Breakdown: Implied Volatility vs. Historical Volatility

Dear Profit Takeover reader,

One of the fundamentals of trading options is understanding how volatility affects options pricing. 

In this video, I broke down the two primary factors I consider when looking at options on individual stocks: Historical Volatility (HV) and Implied Volatility (IV).

Historical Volatility is a measure of a stock’s volatility in recent history, and Implied Volatility is the expectation of volatility in the near future.

Here is the single strongest signal between IV and HV that shows whether it’s a great time to buy or sell options…

When IV is lower than HV, it’s a strong signal that options are cheap to buy.

On the other hand, when IV is higher than HV, that’s a signal that options are expensive and you should take profit on your trades. 

Here’s an example in a stock that has been on my watchlist CCJ – Cameco Corp (NYSE:CCJ):

Image from wallstreet.io

You can see the red line IV (30-day Implied Volatility) was higher than HV (20-day Historical Volatility) in early October, so that would have been a good signal to sell options in CCJ. Now, IV is lower than HV, so it is a good time to buy cheap options in CCJ.

Until next time,

Mark Sebastian

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