It’s said that investors who try to time the market will fail. However, if you’re tracking implied volatility, or IV, you can set up calendar spreads that will give you options to act on a call or a put within a set timeframe.
IV relates to the inherent bounce in the value of a security. It may be easiest to think of them as a boat, tracking in a straight line. A small boat can turn quickly. It may rapidly head in either direction, and as an investor, you want to call when it’s far below the line and sell at the top of the turn. Large boats, such as investment funds, are slower to turn and don’t cover as great a distance above or below the line, so they’re less volatile.
IV is often used in the creation of a contract. The greater the risk for the buyer when purchasing stock options, the greater the reward in the sale if done at the right time.
It’s important to review your risk tolerance before you start investing in IV options. Yes, they can be lucrative. However, they can burn a lot of blood pressure points if you’re not able to manage and accept a loss. Stock investing is a long game. If you will need that money soon, don’t put it in options.
According to TastyTrade, “implied volatility is one of the most important metrics to understand and be aware of when trading options.” A known volatility means that the options contract will result in a bigger payout if you’re willing to take the risk. You’re actually making your money on the risk; the price of the security isn’t that important to you as an investor.
The bigger the risk, the greater the payout. For those that are a little skittish about investing in a volatile stock or group of stocks, investing in the IV is, obviously, risky. However, your investment dollars are going against the expected risk, not the origin of the securities themselves.
To make smart investments on implied volatility, you need to track the company history. Leaving aside big outliers, monitor changes in the sale price over time. If you’re noticing bubbles and bumps that are trending upward, a call option over time with the chance to opt out over the course of the contract will give you either
- gains, or
- a protected and limited loss
If you’re using calendar spreads and you’re seeing growth, keep a careful eye on your expiration dates. Extending the contract may certainly be an option, but you will need to do that before the expiration date hits, or you have to buy at the new price.
The market is constantly changing, and nobody has all of the expertise necessary to always avoid a loss. Again, if you can’t tolerate a manageable loss, stick with buy and hold stocks and leave your money alone. However, if you’re interested in playing in choppier waters, puts and calls with an eye toward cashing in on the IV of a fund can be lucrative.