Volatility Analysis

Overview

Volatility is the most important factor in options pricing. Understanding volatility helps you identify mispriced options and time your entries.

Types of Volatility

Implied Volatility (IV)

What the market expects future volatility to be. Derived from option prices.

• Higher IV = More expensive options
• Lower IV = Cheaper options

Historical Volatility (HV)

Actual past price movements of the underlying.

• 20-day HV = Recent volatility
• 60-day HV = Medium-term volatility
• 252-day HV = Annual volatility

Realized Volatility (RV)

What actually happened during an option's life. Known only after expiration.

Key Volatility Metrics

IV Rank

Where current IV sits relative to its range over the past year.

IV Rank = (Current IV - 52w Low) / (52w High - 52w Low) × 100

• 0-30: Low volatility environment
• 30-70: Normal volatility
• 70-100: High volatility environment

IV Percentile

What percentage of days had lower IV than today.

IV Percentile = Days with IV < Current IV / Total Days × 100

More statistically robust than IV Rank.

IV vs HV

Compares implied to historical volatility.

• IV > HV: Options may be overpriced (sell premium)
• IV < HV: Options may be underpriced (buy premium)

Volatility Surface

Term Structure

How IV changes across expirations.

• Contango: Near-term IV < Far-term IV (normal)
• Backwardation: Near-term IV > Far-term IV (fear/events)

Volatility Skew

How IV changes across strikes.

• Put Skew: OTM puts have higher IV than OTM calls
• Call Skew: OTM calls have higher IV (rare, usually around earnings)

Using Volatility in FlashAlpha

Volatility Dashboard

Access via Analytics → Volatility:

• IV Chart: Current and historical IV
• Term Structure: IV across expirations
• Skew Chart: IV across strikes
• IV Rank/Percentile: Current readings

Volatility Filters in Scanner

Filter scans by:

• IV Rank range
• IV vs HV relationship
• Term structure shape
• Skew levels

Volatility Alerts

Set alerts for:

• IV Rank crosses threshold
• IV spike/crush events
• Unusual skew changes

Volatility Trading Strategies

High IV Environment (IV Rank > 50)

Favor selling premium:

• Credit spreads
• Iron condors
• Short strangles

Why: Expensive options = more premium collected. IV typically mean-reverts.

Low IV Environment (IV Rank < 30)

Favor buying premium:

• Debit spreads
• Long strangles (before events)
• Calendars (selling near, buying far)

Why: Cheap options. Potential for IV expansion.

IV Crush Plays

Around earnings/events:

• IV is elevated
• After the event, IV collapses
• Short premium benefits from crush

Strategies: Iron condors, Short straddles, Credit spreads

IV Expansion Plays

Before known events:

• IV rises into the event
• Long premium benefits

Strategies: Calendars, Long strangles, Debit spreads

Practical Tips

Don't Trade IV Rank Alone

High IV Rank doesn't guarantee premium selling works. Consider:

• Why is IV high? (Known event vs. uncertainty)
• Is the underlying trending?
• What's the term structure?

Account for IV Crush in EV

FlashAlpha's EV calculations account for expected IV changes. Check the "IV Assumption" setting in scan configuration.

Watch for Unusual Skew

Extreme skew often signals:

• Institutional hedging activity
• Known upcoming events
• Potential edge opportunities