You hear me mention this indicator every day during the live show because it’s the single BIGGEST factor I consider when explaining how to profit with options trades. 

It tells you when there’s a buying opportunity…

It tells you when you should take off your profit…

And it’s the reason why traders can make asymmetrical gains on their trades. 

I am talking about volatility, of course. 

And there are two ways to consider volatility and how to master it to better your trades. 

  1. Volatility in the overall market
  2. Volatility on individual stocks

But first, what is volatility?

Volatility measures the expected movement of the market or a stock. 

Let’s break down both of those definitions:

  1. Volatility in the Overall Market

VIX (INDEXCBOE:VIX) is the Chicago Board Options Exchange’s CBOE Volatility Index, a measure of the expectation of volatility of the S&P 500 index.

VIX has a generally inverse correlation with the market. So if the VIX moves higher, it’s likely that the S&P 500 is heading lower. 

When investors are uncertain and expect the market to move significantly, they may sell off their positions until the market recovers some stability. 

I keep a close eye on VIX and use this indicator to inform my daily expiration trades in SPX and  to inform longer-term options plays. 

  1. Volatility on Individual Stocks

There are also volatility measures for each individual stock. 

I pay attention to Implied Volatility (IV) measures and Historical Volatility (HV) measures on individual stocks – because they are the two key factors that tell me exactly what to trade

Here’s how I use IV and HV to make profitable options plays on individual names…

When I take a look at IV or implied volatility in a stock, I compare it with the HV or historical volatility to see whether an option is priced “relatively” expensive or inexpensive.

IV is how far a stock is expected to move and HV is how far the stock has moved in the recent past. 

Generally speaking, if the IV is HIGHER than the HV, that means that the option is more EXPENSIVE and a great time to sell options. 

If the IV is LOWER than the HV, that means the option is priced INEXPENSIVELY and it’s a great time to buy options. 

Here are some examples in AAPL:

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From October 4th-6th, the RED LINE – IV30 was lower than the BLUE LINE – HV20, so this would have been a great time to look for cheap options to BUY, since option pricing would have been less expensive then. 

Then, from October 10th through today, the RED LINE – IV30 (30-day implied volatility) has been higher than the BLUE LINE – HV20 (20-day historical volatility). This would have been a great time to SELL options since they were priced relatively more expensive than in recent history.

So generally speaking, just like stocks, when IV Is relatively high, you generally want to sell options, and when IV is relatively low, you want to buy options. 

Analyzing these charts based on my cheap options scan watchlist helps me recommend the most profitable options plays.

Until next time,

Mark Sebastian

P.S. Do not miss CJ’s Challenge Tonight

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Register right here and join the main room at 8:00 PM (ET) tonight so you don’t miss a second. 


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