Vol Whisperer: So Many Vol Readings. Which One Do I Use?

Different volatility numbers tell you different things. Is one more useful than another? Let's find out.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Game plan: Deciding which volatility number to use
5 min read
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Key Takeaways

  • Understand what the different volatility numbers mean

  • Know what each of the volatility numbers indicate
  • Know where to find volatility values in the thinkorswim platform

Volatility (vol) values are like clues in a scavenger hunt. Each one might reveal the perceived risk of an option and how that exposure could affect your overall trading strategy.

A Walk Through Vol Land

You know vol is important. But should you look at overall implied vol (IV), the IV of each options expiration, or the IV of each option within an expiration?

Overall IV. Use this as a big-picture metric to get a general sense of where vol is in a specific symbol’s options. You can also use it to compare the vol of one symbol to another.

Overall IV of each expiration. Consider this a blended vol, based on a basket of options within a given expiry.

IV of each option within an expiration. This is the vol input (along with stock price, days to expiration, interest rate, and dividend yield) for a theoretical options-pricing model that makes the theoretical options contract price equal to the market price. If the market, and theoretical price, of an option is $3 with a 25% vol input, that option has a 25% implied vol.

Where to Find Vol Values

Fire up the thinkorswim® platform from TD Ameritrade. Select the Trade or Analyze tab and enter a stock symbol. You’ll notice different vol numbers (see figure 1). Let’s explore how they’re calculated.

Chart displaying where to find volatility values in the thinkorswim option chain

FIGURE 1: WHICH VOL? You’ll find different vol values in the Option Chain on the thinkorswim® platform from TD Ameritrade. You can explore an overall implied vol, the implied vol for each expiration, and implied vol for each option. Chart source: the thinkorswim platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

  1. Overall Implied Volatility

    You’ll find this under Today’s Options Statistics. It’s calculated using a method similar to the Cboe Volatility Index (VIX). Overall IV is used for a 52-week IV high, 52-week IV low, and existing IV percentile numbers. It’s also used in the Probability Analysis section of the Analyze tab.

  2. Overall Vol of Each Expiration

    To find the overall vol for options in each expiration, look further up the Trade tab. It’s the number on the right for each options expiration (next to it in parenthesis is an expected move based on the vol). This per-expiration vol shows how much risk the market anticipates. For example, you might see that the first two expirations of a stock have 20% and 21% vols, but the third expiration has 30% vol. In this case, the market might anticipate more risk around earnings, so that higher vol could be linked to an earnings announcement scheduled between the second and third expirations. All things being equal, you could base an options strategy on these vol numbers. If you’re looking for a short options strategy, you might look for an expiration with a higher vol relative to the others. And if you’re looking for a long options strategy, you might consider an expiration with a lower vol.

  3. Discrete Expirations

    When you open up each expiration and look at the strikes, you can see an implied vol associated with each one. Select Impl Vol from the Layout drop-down list.

More Uses for Vol

These IVs are used to calculate the greeks and probability numbers you see for each option. If you base your strategy on the probability of an option expiring worthless, that probability uses the IV of the option in its formula. If you want to sell a covered call against long stock where the call has a certain delta, say 0.30, that delta uses the IV of the option in its formula.

Individual IVs are also used to calculate the greeks for options positions, which you can find in the Position Statement section of the Monitor tab. When vol changes, those greeks change, too, and they can change your position’s risk exposure. If you beta weight your portfolio, changes in vol can have a compound effect, changing the greeks of your underlying positions and any hedges you have. In a word, pay close attention to IV.

Depending on your trading style, any one of these vol numbers could be more important than the others. But consider all of them for clues so you can get the best sense of where vol exists for a given symbol.


Key Takeaways

  • Understand what the different volatility numbers mean

  • Know what each of the volatility numbers indicate
  • Know where to find volatility values in the thinkorswim platform

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