Options traders can spend hours searching for the right stock, studying charts, comparing fundamentals and trying to predict the market's next move.
But Barchart expert Rick Orford argues there's another question worth answering before any of that:
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Is volatility rising or falling?
That distinction can dramatically change the price of an option. A great stock idea can still become a poor options trade if you're paying an inflated premium. Conversely, elevated volatility can potentially create attractive opportunities for option sellers willing to take on the corresponding risk.
In his latest video explainer, Rick demonstrates a faster way to find those situations using Barchart's Rising Volatility and Falling Volatility tools – and a simple relationship between implied and historical volatility that he calls the “secret ratio.”
IV vs. HV: What Is the Options Market Pricing In?
Implied volatility, or IV, represents the magnitude of movement currently being priced into options. Higher IV generally means the options market expects greater movement and, all else equal, option premiums tend to become more expensive.
Historical volatility, or HV, looks backward. Our go-to setting on Barchart measures how much the underlying security has actually moved over the previous 30 days.
That gives traders two different pieces of information: what the market expects to happen versus what the stock has actually been doing.
The interesting part comes when those numbers begin moving apart.
If IV is substantially higher than HV, traders are paying for more future movement than the stock has recently experienced. If IV falls substantially below HV, the options market is pricing in less movement than the stock has recently delivered.
Neither tells you whether a stock will rise or fall. Instead, the comparison provides context for whether option premiums may be relatively expensive or cheap.
The “Secret Ratio”: IV/HV
Barchart simplifies that comparison through the IV/HV ratio.
Rick highlights two important thresholds:
Above 1.05: Implied volatility is at least 5% higher than historical volatility. The options market is pricing in greater movement, which can translate into richer option premiums. Below 0.95: Implied volatility is at least 5% lower than historical volatility. Expectations have fallen relative to the stock's recent realized movement, which can translate into cheaper premiums.Why not react every time the ratio moves slightly above or below 1.00? Because small differences can simply be noise. The 1.05 and 0.95 thresholds create a larger separation between what traders expect and what the underlying has actually delivered.
But Rick stresses that the ratio isn't a trade signal by itself. Earnings, FDA decisions, acquisitions and other catalysts can justify unusually high or low volatility. The ratio is designed to narrow the search – not replace due diligence.
How Barchart Data Surfaces Trade-Worthy Volatility
A one-day IV spike doesn't necessarily mean a new volatility trend has begun.
That's where Barchart's Rising and Falling Volatility pages go another step.
For volatility to qualify as rising, Barchart looks for the 5-day average IV to be at least 5% above the 20-day average, an IV/HV ratio above 1.05, and implied volatility already trending higher.
Falling volatility reverses those conditions: the 5-day average IV must be at least 5% below the 20-day average, IV/HV must fall below 0.95, and implied volatility must already be trending lower.
The results are also limited to 500 of the most actively traded stocks based on options volume. That helps remove many securities with illiquid options, wide bid/ask spreads or contracts that barely trade.
Instead of manually opening hundreds of charts looking for volatility changes, traders can begin with a concentrated list where those changes are already occurring.
Add IV Rank Before Making the Trade
Rick doesn't stop at IV/HV.
He combines the volatility trend with IV Rank, which measures where current implied volatility sits within its own 52-week range.
An IV Rank near the top of the range suggests options are expensive compared with their recent history. A low reading suggests they're relatively cheap.
Rick generally avoids buying options with an IV Rank above 80 because premiums are already near historical extremes. Conversely, he avoids selling options when IV Rank falls below 20 because there may be relatively little volatility left to contract – and therefore less premium available to collect.
Barchart's pages incorporate those 80/20 parameters alongside the other volatility criteria, giving traders another filter before they begin analyzing an individual trade.
Build a Volatility Screen Into Your Morning Routine
Instead of beginning every morning by randomly searching for stocks, Rick recommends checking Barchart's Rising and Falling Volatility pages first. In less than a minute, traders can identify actively traded stocks where volatility expectations are meaningfully changing.
From there, they can investigate IV/HV, IV Rank, IV Percentile, earnings dates, liquidity, technical trends and Expected Move before deciding whether an opportunity deserves further attention.
Watch Rick's complete walkthrough to see the Rising and Falling Volatility tools in action, a Microsoft (MSFT) put example step by step, and how he combines volatility with Barchart's Expected Move and Trend analysis before evaluating a trade.
Then visit Barchart's Options tools and try the process yourself: find one stock where volatility is changing, add it to a watchlist, and monitor how its IV/HV ratio changes as new information enters the market.
For more how-to videos and explainers from experts like Rick, check out our official YouTube channel.
On the date of publication, Barchart Insights did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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