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Implied Volatility Index and related indicators:
How you can use them in trading & risk management

Continued from "Implied Volatility Index and related indicators: How you can use them in trading & risk management, part I"

In last weeks newsletter we discussed Implied Volatility Index (IVX) calculations and compared it to a popular "fear gauge" indicator - CBOE VIX®. Now it is time to have a look at the practical usage of IVX in trading and risk management. Of course we'll take advantage of services to show you several examples.

Absolute value of IV Index

The absolute value of IV Index is what anybody would think of first. A high value of IV Index indicates that the market considers the stock risky and its options are expensive as a consequence. Low IV Index level is an indicator of a stable stock with cheap options (low premium for the risk) on the contrary. This is the primary usage of IVX - to find risky / healthy stocks, or, in other words, stocks with expensive or cheap options.

So far, so good - but what is the "high" and "low"? Roughly, for middle-priced stocks values about 20% are generally considered low, while values above 60 % - high. But this estimate is not generally applicable for penny stocks where 70-80 % range can be considered as a low to normal, and high IVX zone lays somewhere above 120%. We'll return to this interesting topic in our next newsletter - the evolution of IVX bands, their dependence on stock price range and correlation with general market conditions.

There are two services at that will show you absolute value of IVX value in historical perspective - Advanced Historical Data and Stock Sentiment - see more details below.

This 20-60% bound's range is an average market value. As we said this range couldn't be applied to just any stock - and we do avoid this on our site. If you are going to compare different stocks by their IVX, it seems better to use relative values like Implied Vola as a scaled % of IV Hi/Low range or Relative Volatility.

Implied Vola as a scaled % of IV Hi/Low range

This value simply shows how close the current value of IV Index is to 1 year high or low boundaries. It varies in the 0 to 1 range, and a current value of 1 means that the stock's IVX has hit a new 1-year high (0 means we're at 1 year low respectfully). The advantage of using this indicator for options cost (or stock risk) estimation is that it is effectively a normalized IVX, and makes this value comparable between different stocks. Let's have a look on a hypothetical example:

Stock XY1:  IVX 1 year low - 20 %, IVX 1 year high - 60 %
Stock XY2:  IVX 1 year low - 45 %, IVX 1 year high - 55 %

Let the current value of IVX be 50 % for both stocks. Which stock is more risky (has dearer options)? Absolute IVX value does not tell anything definite, while IVX as a scaled % of IV Hi/Low range gives an idea:

Stock XY1:   (50% - 20%) / (60% - 20%) = 0.75
Stock XY2:   (50% - 45%) / (55% - 45%) = 0.50

Evidently, stock XY1 approaches the high IVX, risky zone, while XY2 is in its "normal" state as of now.

You can rank stocks by Implied Vola as a scaled % of IV Hi/Low range in the Advanced Ranker service - a generic stock-level ranker. Also, this feature is available in more specialized Spread Scanner - the service designed to scan for almost any two leg strategy on a single underlying (look for "IV in 52 wk Range" indicator here)

Another "normalized" IVX indicator is "Relative Volatility".

Relative Volatility

This indicator is a ratio of IV Index to Historical Volatility (HV). So basically it compares forecast volatility against realized historical one. It is sometimes recommended to use for expensive / cheap options scanning, but you should understand one thing - options are not priced off HV, so low HV level does not tell that options on this stock are / were cheap, for example. That's why IVX / HV (Relative Volatility) does not necessarily show the "normalized" options' cost too. High IVX / HV level basically just tells that the expected variation of stock price is greater than realized one.

This information is of high importance if you are dealing with strangles or straddles (long / short Put and Call on the same underlying) - if you buy them, you really need large price movement to offset your investment in the strategy. On the contrary, low IVX / HV can indicate that its time to sell strangles or straddles - stock price movement is expected to be minor and assures that you would keep the large part of the premium received.

One of default profiles in our Spread Scanner service is a Long Straddle - "Relative Volatility"is High (above 1.15) and "IV in 52 wk Range" is Cheap (between 0.15 and 0.5 - as you are not going to buy expensive Call and Put, right?) The "Short Straddle" profile has these settings of Low (below 0.85) and Expensive (between 0.5 and 0.8) - for quiet stocks with expensive options.

Nevertheless, if you are going to use Relative Volatility as a measure of options' cost, or for any other purpose outside strangle strategy context - you can rank stocks by this indicator in the Advanced Ranker service. It goes under "Implied Vola as a % of HV" name here.

IV Index analysis and data download

We hope you agree now that IV Index is a valuable indicator and worth detailed analysis. A perfect tool for such analysis is the Advanced Historical Data service

On our site, you can find three different Implied Volatility Indexes (IV Index or IVX):

  • Current value of IVX, along with its position in 1 year range
  • Comparison with IVX value 1 day, month, year ago
  • IVX history on chart with relation to stock price, HV and other values
  • IVX distribution bar chart

If you want even more you can always download IVX historical data for further analysis in Data Download Wizard or order daily updates in Daily Updates Wizard.

Stock sentiment analysis

It's not a secret that options can be used for stock analysis since they 'carry' valuable information of how the market estimates stock's perspectives. So even if you never trade options you can benefit from the Stock Sentiment service. This powerful analysis tool makes all the math and presents you with a stock summary. The following factors are taken into account:

  • IVX term structure - risk distribution in time
  • IVX Call / Put ratio - a contrarian indicator, showing whether the stock is overbought / oversold

There is also a good reason to input IVX30 into Bollinger Bands calculator in this service - to see what price range is 'implied' for this stock.

To be continued...

The next newsletter will answer a couple of interesting questions:

  • What are the typical IVX bands for different groups of stocks?
  • How IVX bands are correlated with general market conditions?
  • Can we use IVX to tell what type of market is ahead?

Should you have any questions you can either write to us directly ( or, if you think you question is worth public attention where more clients can also benefit , please use our ‘Methodology’ Forum:

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