implied volatility quick tips | Outlier Insights
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1. Market Analysis.
Major U.S. indices extended their upward trajectory this week, building on the momentum from the Federal Reserve’s recent rate cut, with several benchmarks notching fresh record highs amid renewed investor optimism.
The S&P 500 achieved multiple all-time highs during the sessions, reflecting broad-based strength before a slight pullback toward the week’s end, highlighting a resilient yet cautious market sentiment.
Nasdaq experienced gains early in the week driven by technology sector rebounds, but faced some downward pressure later, underscoring the index’s sensitivity to shifts in high-growth stock valuations.
The Russell 2000 outperformed larger peers, continuing its rally as small-cap stocks benefited from easing monetary policy and rotational buying away from mega-caps.
Volatility, as measured by the VIX, trended lower overall, indicating reduced market anxiety and a more stable environment for options traders despite occasional intraday swings.
Gold prices pushed toward new peaks, supported by safe-haven demand and expectations of further rate reductions, creating attractive setups for volatility-based options strategies in precious metals.
Crude oil advanced steadily, bolstered by supply constraints and positive demand outlooks, which in turn lifted energy-related equities and offered skewed opportunities in commodity-linked derivatives.
Bitcoin showed upward momentum amid broader risk-on flows, though it remained volatile, with traders eyeing potential breakouts tied to macroeconomic developments.
In sector trends, materials led the pack with strong gains, driven by global stimulus measures, while consumer discretionary also advanced, pointing to rotational plays for options focused on economic recovery themes.
Technology and communications services sectors saw mixed performances, with initial surges giving way to profit-taking, suggesting opportunities in strangles or iron condors for range-bound expectations.
Notable stock news included a rally in semiconductor names like Intel following reports of potential multibillion-dollar investments, which sparked interest in call options amid sector consolidation talks.
Other standout movers featured declines in AI-heavy stocks like Nvidia, as investors rotated out, creating put skew advantages for those anticipating continued corrections in overvalued tech plays.
Key U.S. economic news centered on tame inflation readings from the PCE report, reinforcing bets on gradual Fed easing and boosting market confidence without overheating concerns.
Robust jobs data further supported the soft-landing narrative, with lower unemployment claims alleviating recession fears and encouraging risk-taking in equity options markets.
Globally, China’s aggressive stimulus package ignited a surge in Asian equities, spilling over to U.S. markets through commodity and export channels, setting up cross-border hedges for options traders eyeing international ripple effects.
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2. Erik’s Brainstorming.
this post is to address a few misunderstandings regarding volatility in options trading with the goal of guiding new traders to better decisions.
no matter what trade you are putting on, if you are trading an option, you should pay attention to volatility. in some trades, it can be the difference between making and losing money. in others (like covered calls) it doesn’t matter quite as much but is a refinement input.
first, remember to use something like IVP and NOT IVR.
IV rank is highly skew prone (using the extremes from the past year). they often will be close to one another until there is a large move that can skew things for the entire following 52 weeks (until that data point rolls off).
for example, CSCO IVR is ~19% this would lead us to believe IV is low. yet, IVP is actually 47% which is quite elevated.
next, the mantra of buy vol when it’s cheap and sell when it’s high is a rough concept and should not be blindly applied for several reasons.
depending on the trade idea, it can make complete sense to sell vol when it’s low (some of the best times to capture variance risk premiums are during these exact times).
it can also make sense to buy expensive vol if you’re wanting leverage in something that’s fast moving. you simply need to make an assumption of potential changes in volatility (using vega) against what you expect to make via direction (delta and gamma), remembering to include theta as well.
finally, IVP and underlying based IV is a static window of 30 days. this may or may not apply to the timeframe you are actually trading.
using CSCO again, spot IV is 25% sitting at 47% IVP. yet, 60 day options are at 27% which is 87.9% percentile! the current vol for those 60 day options is extremely high relatively.
Be an Outlier
Erik
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The content presented is for informational purposes only and any opinions, news, research, analyses, or other information contained are provided as general market commentary and do not constitute investment advice. Outlier Trading, its affiliates, and employees are not responsible for any investment decisions made based on the information presented. We do not guarantee the accuracy, completeness, or reliability of any information presented and are not liable for any losses or damages arising from the use of or reliance on this information. By accessing this content, you acknowledge and agree to these disclosures and terms of use.