Understand the difference between implied and historical volatility and how to use them to analyze overall options volatility
Know how to analyze relationships between options prices and other metrics such as options greeks and volatility values
Learn how to apply implied volatility, historical volatility, and price relationships to help make options trading decisions
Whether you’re new to options trading or have been trading them for a while, it can be helpful to know about volatility (vol), put or call options, and vol skew just to get an idea of where directional bias stands. For example, put and call options can help professional traders and institutional investors manage risk. So, if you follow their trading activity, you may get some idea of how the pros view market direction. You may also get an idea of how much expected vol is priced in to the market and how that compares to the actual vol.
There are tools on the thinkorswim® platform that can help keep you in the loop.
Today’s Options Statistics: Keep an Eye on Vol
The life of an option trader revolves around making strategy decisions, and that involves analyzing a bunch of metrics such as implied volatility (IV), historical volatility (HV), how many puts or calls traded, where they traded with respect to bid or ask prices, and so on. But just knowing the numbers may not be enough. Sure, you may be able to make more educated trading decisions, but you should also know what the numbers mean. We’ll start with some of the options stats.
From the Trade tab on thinkorswim, scroll down to Today’s Options Statistics, which you’ll find below the Option Chain (see figure 1). The statistics are divided into three sections: volatility data, Trade Analysis, and Sizzle Index.
FIGURE 1: FIGURING OUT VOL, TRADING ACTIVITY, AND ANY UNUSUAL ACTIVITY. The thinkorswim platform offers options statistics such as implied vol, historical vol, number of calls and puts traded, where they traded, and the Sizzle Index. Chart source: The thinkorswim platform. For illustrative purposes only. Past performance does not guarantee future results.
Implied and Historical Volatility Data. IV represents the potential price movement for an underlying security in the future. It’s expressed at the annualized level. HV provides a historical perspective by measuring potential price movement of an underlying security based on previous price movement. Think of it as the moving average of price range over the past year.
The IV for the stock in figure 1 is 28.56%, which means the options market has priced in about a 29% variability from the prevailing price on an annualized basis. But a trader might be more concerned about shorter-term moves. The other data found under Today’s Options Statistics may help:
- 52-week IV High and Low. This shows you the IV range for the last year. The current IV percentile tells you where the prevailing IV is with respect to its range. In the last year, IV has been as high as 66.2% and as low as 14.7%. Current IV Percentile. A current IV percentile of 25% means that the 28.56% IV is in the lowest quarter of all IV readings during the past year. That means 75% of the time IV has been higher than 28.56%.
Another way to view vol is to compare the IV to HV:
- 52-week HV High and Low. In the example in figure 1, HV has been as high as 51.7% and as low as 15.2%. That’s a pretty wide range.Current HV Percentile. This sits at 10%, which is lower than the IV percentile.
You’ll also find the Volume-Weighted Average Price, or VWAP, listed under the vol data. This data point gives you an idea of the average price based on the number of shares and contracts traded.
There are different ways to use this data in your options trading, which could potentially help you decide on an options strategy. Some options strategies may be better suited in a high-vol environment, whereas others may be more appropriate in a low-vol environment.
Trade Analysis. This compiles the data for options traded during the trading day. You can see how many were calls and how many were puts. You can also see if they traded at or below the bid, at or above the ask, or between the market. This information can be helpful when determining where to enter or exit your trade. Delta is another helpful metric, and you’ll find the aggregate deltas of all traded options under Delta Between displayed in quintiles, although you can change the default values. Note that deltas are displayed in absolute values.
Sizzle Index. The name kind of gives it away, but generally, this data point tells you if trading volume is within a normal range. The Sizzle Index is the ratio of the current day’s options volume to the average options volume of the underlying for the past five days. So, a Sizzle Index above 1 indicates unusual trading levels, and as you head into earnings, you may find the value go higher than 1. You’ll find the overall Sizzle Index as well as the sizzle for calls, puts, vol, and the stock. You can use the Sizzle Index to scan for stocks that have unusual options trading volume. This can be helpful because the scan will do most of the work and identify the stocks you may want to add to your watchlist. You could add the Sizzle Index as a column on your watchlist to get an idea of options activity for a specific underlying. And when viewing a specific option chain, you’ll find call and put Sizzle Index values. You’ll also find the put/call (P/C) ratio listed here, which gives you an idea of whether traders are neutral, leaning more toward calls, or leaning more toward puts.
Product Depth: A Deeper Dive
The Product Depth screen may look like a mess of lines, but each line tells you something. When you analyze a trade, the current greeks, vol values, and other parameters are relevant for that moment. But after you place a trade, they’re likely to change, which is why it’s a good idea to analyze the relationship between prices and other parameters. The Product Depth tool displays the IVs graphically so option traders can see the vol for the different strikes and expirations (see figure 2).
FIGURE 2: PRODUCT DEPTH. The tool can be used to follow the relationship between price and another value for various options series. In this example, you see the relationship between price and delta for five options series. Chart source: The thinkorswim platform. For illustrative purposes only. Past performance does not guarantee future results.
To access the tool, follow these steps.
- On thinkorswim, select the Trade tab and scroll down to Product Depth.Select Options.From the drop-down menu under Show, choose the options values you want to calculate. You might select calls, puts, out-of-the-money (OTM) options, an average, or puts and calls together.Select the options series for which you want to calculate values. The fewer series, the less messy the chart will look. Each series is represented by a different color (you can customize these).Select the number of strikes.If you want to study the relationship between delta and options prices, select Delta from the menu on the right. You’ll see a long list of other values you could also choose.
Once the curves are plotted, they’ll change in real time. Deltas will be close to 50% for at-the-money options. You can watch how price changes as the options become further OTM or move in the money.
The Product Depth tool could be helpful in identifying vol skew. Generally if risk is to the downside, skew tends to be up, and if risk is to the upside, skew is down. But things don’t always go as expected in the stock market. So, by analyzing the relationship between price and IV of different options series in an underlying, you may be able to identify unusual activity.
Being aware of IV, HV, and relationships between price and other metrics such as delta and IV could give you an idea of what the market is anticipating. This could potentially help with deciding which options strikes and expirations to trade.
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Jayanthi Gopalakrishnan is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.