Options traders hear the same advice constantly: buy options when volatility is low and sell options when volatility is high.
The problem is that implied volatility by itself doesn't tell you whether an option is actually cheap or expensive — or whether volatility is moving in your favor.
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A stock with high implied volatility could become even more volatile. A stock with low IV could continue getting quieter. And a one-day volatility spike can disappear just as quickly as it appeared.
That's why looking at the direction of volatility and how implied volatility compares with the stock's actual movement can provide traders with considerably more information than IV alone. Barchart's new Rising Volatility and Falling Volatility pages are designed to find exactly those situations across the most actively traded optionable stocks.
And in a new video, Barchart options expert Rick Orford shows how he turned those signals into two very different trades.
The Volatility Ratio Options Traders Should Know
One of the most useful measurements is the IV/HV Ratio, which compares implied volatility with historical volatility.
Implied volatility represents the options market's expectations for future movement. Historical volatility measures how much the underlying stock has actually been moving.
When the IV/HV Ratio rises above 1.05, the options market is pricing more volatility than the stock has recently delivered. That can make premiums more attractive for option sellers. When the ratio falls below 0.95, options are pricing less volatility relative to the movement the stock has already experienced, potentially creating a more favorable environment for option buyers.But there's another problem: one day's reading can be misleading. Barchart therefore compares the stock's 5-day average IV with its 20-day average IV to determine whether volatility is actually trending.
For Rising Volatility, the 5-day average IV must be at least 5% above its 20-day average, the IV/HV Ratio must exceed 1.05, and implied volatility must already be climbing. Falling Volatility essentially looks for the opposite conditions.
Now traders aren't simply asking whether IV is high or low. They're asking where volatility is headed next.
Rising Volatility For A Long Call Setup
Orford started with Barchart's Rising Volatility page and then added several additional filters, including market capitalization, options open interest and Barchart's overall technical opinion.
But one additional filter was particularly important: IV Rank between 40% and 60%.
Why? Buying options after volatility has already exploded can leave a trader paying an enormous premium immediately before IV collapses. Instead, the goal was to find volatility beginning to rise from relatively normal levels.
After applying the filters, a full list of candidates became just one: Samsara (IOT).
Orford then examined an at-the-money $40 call expiring September 18, with Samsara's next earnings announcement scheduled for September 3. That creates an interesting combination.
If IOT rises, the call can benefit from the directional move. If implied volatility continues rising ahead of earnings, the option's premium could also benefit from volatility expansion.
If both happen simultaneously, the trader potentially has two forces working in the same direction. That's the advantage of finding the volatility trend before blindly buying an option.
Falling Volatility Creates the Opposite Opportunity
Falling implied volatility can benefit option sellers because declining volatility can reduce an option's premium. Time decay can simultaneously continue working against the option's value.
This time, Rick screened for stocks with an IV Rank of at least 60%, looking for relatively expensive volatility that had already begun declining.
The initial list of 81 stocks narrowed to just two: Applied Materials (AMAT) and Corning (GLW).
But AMAT revealed another lesson that may be even more important than the volatility screen itself. Its earnings announcement was only days away.
Earnings can produce enormous overnight moves and volatility changes, potentially overwhelming an otherwise attractive setup. Rather than turn a volatility trade into an earnings gamble, Orford eliminated AMAT. That left Corning.
The Corning Short Put
For GLW, Orford examined the September 18 $125 put, approximately 21% out of the money at the time of his analysis.
Selling the put generated approximately $2.44 per share, or $244 per contract.
The thesis is fundamentally different from the Samsara trade:
With IOT, the trader wants rising volatility to potentially increase the value of an option they own. With GLW, the trader wants falling volatility and time decay to potentially reduce the value of an option they've sold.If GLW remains above the $125 strike through expiration, the put expires worthless and the seller retains the premium, assuming the position isn't closed earlier.
Orford also explains why he generally doesn't need to hold a short option until expiration. If volatility continues falling and enough of the premium disappears early, buying the option back can lock in a portion of the potential profit while removing the remaining risk.
Don't Confuse a Volatility Signal With a Trade Signal
There is one major warning.
These screens tell traders what volatility is doing. They don't tell them why it's happening.
Rising volatility could precede a bullish catalyst, but it could just as easily reflect fear surrounding bad news. Falling volatility doesn't guarantee that a stock will remain stable either.
That's why earnings dates, technical direction, liquidity, IV Rank and the underlying company still matter.
Applied Materials provided the perfect example. It passed the volatility screen, but an imminent earnings report changed the risk completely.
The Bottom Line
The mistake isn't buying options when volatility is rising or selling them when volatility is falling. It's assuming that IV alone tells you enough to make that decision.
Comparing implied volatility with historical volatility helps show whether options are expensive or cheap relative to the movement the stock is actually producing. Comparing 5-day and 20-day average IV adds another layer by revealing whether that volatility is building or fading.
From there, tools like IV Rank, Barchart's Technical Opinion, options open interest and the Earnings Calendar can help narrow hundreds of stocks into a much smaller list of potential setups.
In Rick Orford's latest video, he walks through the entire process on Barchart, including the Samsara long call, the Corning short put and the Applied Materials trade he rejected.
Watch the full video to see exactly how Rick builds his trades from the screeners. Then head to Barchart's Rising Volatility and Falling Volatility pages and run the screens yourself. Input Rick's additional IV Rank filters, check the next earnings date, and see which long-option and premium-selling opportunities make it through.
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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