How to Trade Volatility Like a Pro ⚠️ #Options #ImpliedVolatility

I've got a quick question for you. If a stock's implied volatility is climbing right now, is that a green light to buy options or a red flag to stay away? And if that same IV is falling, does that automatically mean it's time to sell premiums? Well, many traders think they know the answer, but the truth is IV alone doesn't tell you what to do. It's how that volatility relates to what the stock's actually doing and where that trend is headed that separates a real opportunity from a trap. That's why in this video, I'm going to show you two brand new pages on bar chart, rising volatility and falling volatility that do all the heavy lifting for you. These screeners scan the 500 most actively traded option names and flag exactly when a stock's volatility is genuinely trending, not just spiking for a day. And then I'm going to walk you through two live trade examples. First, a long call that I'd consider on a stock coming off the rising volatility page. And then I'm going to look at a short put from the falling volatility page and why I ruled out one very tempting trade along the way. and what that mistake could have cost me. And by the end of this video, you're going to know exactly how to use both of those pages, what trades fit each environment, and the two biggest risks that you need to watch for before you place your first trade. So, let's get into it. Now, first, I'm going to recap a few volatility metrics that I'm going to use in this video. If you're already aware of them, just feel free to skip to the next chapter. Now, implied volatility is the market's forwardlooking guess at how much a stock might move. Historical volatility is the reality check, what the stock has actually done over the last 30 days. Now, on their own, neither of them tells you very much. But when you put them side by side, they start to diverge, and that's where we find the opportunity. And I'm talking about the IV over HV ratio. Anything above 1.05 05 and the option market prices in more movement than the stock has actually delivered. So premiums tend to favor the sellers. And below 0.95, it's the exact opposite. The market's underpricing the movement that's already happening. So premiums run cheap and that tends to favor buyers. But a one-day reading, it can lie. So bar chart doesn't stop there. It layers on a trend check by comparing the 5-day average IV to the 20-day average IV. And that'll separate a real building trend from a one-day blip. And the results are now visible on the new rising and falling volatility pages. These use a platform-based screener to identify stocks that meet specific volatility criteria. For rising volatility, you need all three lining up together. The 5-day average IV running at least 5% above the 20-day average, the IV over HV ratio above 1.05, and IV itself already climbing. And for falling volatility, it's the mirror image. The 5-day average has to be at least 5% below the 20-day average. The IV over HV ratio has to be under 0.95. and IV has to already be sliding. And both lists stick to the 500 most actively traded option names, so you're not chasing signals on stocks that you can't actually get in and out of. Now, that's all great, right? Less work for you, and you even get a built-in volatility interpreter with the deal. But once a stock lands on one of these pages, what do you actually do with it? Well, that's where the trade selection comes in. And the rising and falling volatility pages call for very different playbooks. So, let's start with rising volatility. For the most part, rising volatility is a favorable trading environment for people looking to buy options. So, those are your long options, which also include debit spreads, straddles, and strangles. But why is that? Well, when volatility rises, options premiums tend to increase. But if you're already holding an option when that volatility expansion happens, well, that increase in premium is what works in your favor. That's because your option now becomes more expensive as volatility rises. Think about your typical long call. You buy that to get upside exposure on the underlying asset. And if the stock starts making bigger moves and traders become more willing to pay for options, the value of your call increases. And you know what's even better? The premium can increase even if the stock hasn't moved as much as you'd expected. And this is especially true for strategies like straddles and strangles. You're already paying a relatively large premium because you're buying both sides of the market. If volatility expands after you enter, that can give the position an additional boost. But it comes with a catch. You don't want to blindly buy options just because volatility is rising. If implied volatility is already extremely high, you could end up paying an inflated premium right before volatility falls back down. So the ideal setup is usually volatility that's rising from relatively low or normal levels. preferably when you have a catalyst or any other reason to expect the stock to make a larger than normal move. Now, let's put that to the test and see if we can find a good long call trade from the rising volatility page. By the way, if you don't know what a long call is, don't worry. Everyone has to start somewhere. Just watch this video for an indepth look at the strategy. All right, so let's get back to it. From here, I'm going to click the screen and go to the stock screener tool. Then, I'm going to add a couple of filters. First, I'm going to use market cap and I'm going to limit that to large and meggaap stocks. Next, I'm going to add total open interest, which shows how many option contracts are currently open. Then, I'm going to add bar charts overall buy, sell, hold signal. This filter combines several technical indicators including moving averages, momentum, and other trend following signals. And that'll provide a quick way to screen for stocks with an overall bullish bias. And of course, I'm going to set this to buy. Now, this will all depend, of course, on your preferred strategy, assuming you want to buy a call. But if you want to buy a put option, then you would want to set this to sell. After that, I'm going to add IV rank. Now, you might be wondering why I'm adding IV rank when the rising volatility page already did the IV checking for us. Well, there's a very good answer for that. I want to find stocks that have rising volatility, but not necessarily high IV. That way, I can focus on stocks whose volatility is rising from relatively normal levels rather than on stocks where volatility is already extremely elevated. This gives me a better starting point for long calls while potentially allowing me to gain exposure as IV continues to increase. So, I'm going to set IV rank to look for ideas that have an IV rank between 40 and 60%. And there you have it. Out of the 13 stocks that appeared on the rising volatility page, only one fit the bill, Samsara. So, let's jump over to the stocks profile page and look for long calls. And of course, the screener can be found right here. In this case, I'd want to buy an at the money long call with about 30 to 45 days to expiration. This way, I'm giving the position the best shot at benefiting from continued IV expansion, and that's because at the money options carry the most sensitivity to volatility changes of any strike prices. So if Samsara's implied volatility keeps climbing the way the screener suggests that it's starting to do, this option can gain value even before the stock itself makes any major move. And that 30 to 45day window gives that thesis room to work. It also includes the next earnings release which is on September 3rd which you can see right here at the top. And that's exactly the kind of catalyst that this setup is designed to capture. That's because earnings tend to drive IV higher in the days and weeks that lead up to the report as the market prices in the uncertainty of that announcement. So with that in mind, I'm going to change the expiration date to September 18th, which from the date of recording is 39 days away. Then I'm going to choose the $40 strike long call right here. According to the screener, I can buy this for $4.20 a share or $420 total. The break even price is $44.20, and that's just the strike price plus the premium, which is the point at which the options value at expiration exactly covers what I paid for it. But here's the thing, this trade can start becoming profitable even if Samsara hasn't reached $44.20. How is that possible? Well, remember the reason I screen for the underlying assets on the rising volatility page is so that whatever trade I choose, it's riding both the stock's potential upside move and the continued climb in volatility. If that IV keeps building over the next few weeks, the market may start to price in a bigger than expected move for Samsara and that'll get reflected directly in this options premium. And since I chose an at the money strike, this contract is the most sensitive to exactly that kind of increase in volatility, at least compared to any other strike on the chain. So even on a day where Samsara barely budges, when IV ticks higher, this option can gain value anyway. And that's the real edge of this setup. If Samsara goes up, the long call gains value. If Samsara doesn't go up and volatility increases, the long call also gains value. But if both the stock price and volatility go up, well, that would be called a jackpot. Now, let's jump over to the falling volatility page. This environment is better for selling options like covered calls, cash secured puts, and credit spreads. But you may have heard at least somewhere that you want to sell options when volatility is high. And yes, there's a lot of truth to that, but it's missing the second half of the point. You sell options when volatility is high but falling. So, how do you do that? Well, you can do that. You can find trades through the falling volatility page. So, let's go to screen. And then from there, we're going to add some of the same filters from earlier. But this time, instead of setting ID rank to between 40 and 60%, I'm going to set it to 60% and above. An ID rank of 60% or higher tells me that implied volatility is relatively expensive compared with the stock's own historical range. In other words, premiums are higher than usual. Then by using the falling volatility page, I'm specifically looking for stocks where that elevated volatility is already starting to decline. And this creates the exact setup that I'm looking for. A high IV stock that's displaying signs of falling volatility. So now from a total of 81 underlying stocks, the list gets down to two. Applied materials and Corning incororated. Now, let's say I want to sell a put option on one of these two stocks. Well, the goal will be for the stock to trade above the strike price at expiration. And of course, you get paid at the start of the trade. It's a good income strategy. And by the way, I talk a lot about it in this video up here if you want to deep dive. In any case, I now have two options for selling put options. So, which one should I pick? Well, I'm going to go back to the set filters tab here and quickly add the next earnings date filter. So, applied materials is set to release earnings on August 13th, and that's a little over 2 days away from the time of recording. Corning, on the other hand, is a couple of months away from reported earnings. So, for me, that's a very easy decision. I'm going to use Corning as the underlying asset. Now, you might be wondering why I picked Corning over applied materials. Well, earnings tend to amplify volatility. And once that report hits, we might see a sharp sudden move in the stock that could work against the short put because remember the goal here is for the stock to stay above the short put strike at expiration. For that reason, I don't usually like to sell puts around earnings. It's just too risky to justify whatever premium is available. So, I'm going to pass on applied materials for now. Now, of course, if it's right after earnings, then that's an entirely different matter. But I digress. So, let's go back to Corning's stock page and look for short puts right here. Then we look at the expiration date. This time though, the rationale for choosing 30 to 45 days is to give the trade enough time to benefit from both time decay and more importantly, hopefully a decline in implied volatility without tying up capital for too long. Now, as for the strike price, I'm going to choose the one with the highest probability profit. So, that's $125, around 21% out of the money. If I sell that, I get $244 a share or $244 per contract immediately on this short put. As long as Corning stays above $125 by September 18th, I'm going to keep that full $244 with no further obligation. Now, in case I wanted to exit the trade early, like at any time before the expiration date, and volatility keeps falling, well, that means the option premium could continue to shrink. And that would allow me to buy back the put option for a lot less than I originally sold it for. That works for me because I can typically exit trades when I can crystallize somewhere between 50 and 80% of the premium. There's no sense in holding on to a short option until expiration if I can get the most out of it way earlier. Now, before you go and run these screeners yourself, let's talk about a couple of risks that's worth keeping in mind. First, these tools tell you what volatility is doing, not what the stock is doing. A stock can show up on a rising volatility page for reasons that have absolutely nothing to do with a bullish catalyst. And that's because bad news also causes IV to spike as well. So always dig into why a stock is showing up before assuming that the setup favors your thesis. Second, earnings and other binary events can undo the entire trade overnight. And we saw that firsthand with Applied Materials, a stock that technically fit every filter, but still got tossed out because of an earnings release just two days away. Skipping that check is one of the fastest ways to turn a well-reasoned volatility trade into an earnings gamble. And that's the playbook. Two very different environments, two very different approaches, but both built off the same core idea. Try and figure out what implied volatility is actually doing relative to reality and let that tell you whether to be a buyer or a seller. But as always, I've got a challenge for you. Head on over to our rising and falling volatility pages yourself and see if you can find one stock on each list that fits the extra filters I use today. IV rank between 40 and 60% for rising volatility and 60% plus for falling. Then double check the earnings date on both before you do anything else. And you can use a practice account to trade these and see how you do. But now I want to turn it over to you. Which setup would you actually trade this week? The Samsara style long call or the Corning style short put. Let me know all of that and more in the comments. And while you're there, if you found the video helpful, don't forget to like and subscribe because it really does help others find the video. It supports the channel and it makes sure that you don't miss out on our next deep dive. Well, that's it for me today. Thank you so much for watching and I hope to see you again here on YouTube. Bye for now.