Hello, my friend, and welcome to this post on Buying Options Implied Volatility. Buying options with low implied volatility can be a huge mistake because low-volatility markets don’t move! This post shows you a better way.
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Buying Options Implied Volatility – Video
Alright, friends, it’s time for some myth-busting. This might be a bit controversial at first, but stick with me for the next 8-9 minutes, and I hope you’ll see the truth. Not only that, but it could also help you make more money.
A common belief in options trading is that you should buy options when implied volatility is low. The reasoning goes like this: volatility affects option pricing, so low implied volatility means the options are cheaper to buy. On the other hand, for selling strategies, you should sell when implied volatility is high to collect a higher premium. Sounds logical, right? Well, not so fast.
This concept is more of a half-truth. While it’s not entirely wrong, it’s misleading enough to cause losses. Here’s why. In a U.S. courtroom, witnesses swear to tell “the truth, the whole truth, and nothing but the truth.” That principle applies to trading too. The details matter because broad, oversimplified statements—like the one about buying options with low implied volatility—can lead to costly mistakes. As I like to say, “The dollars are in the details.”
Into the Details – Buying Options Implied Volatility
So, let’s dig into implied volatility and options. Here’s a quick overview: volatility is relative. You might see low volatility in one range and high volatility in another. Conventional wisdom says to buy during low volatility, but let’s think this through. Low volatility means the market isn’t moving much. If prices aren’t swinging, why would you pay a debit to buy an option when there’s little movement to generate profit? Options need price action to overcome their cost, so simply buying cheap, low-implied volatility options isn’t a sound strategy.
The real key isn’t just low volatility—it’s the trend of implied volatility. When I buy options, I look for areas of relatively low implied volatility, but more importantly, I aim to catch the start of an upward implied volatility trend. This approach allows me to profit not only from the movement of the underlying asset but also from the increase in the option’s value due to rising implied volatility. Essentially, I’m double-dipping: benefiting from both price movement and the volatility increase.
Where the Big Money Trades Happened – Buying Options Implied Volatility
For example, if implied volatility rises while the underlying asset’s price also moves in your favor, the option’s value increases significantly. Even if the price stays flat, a rise in implied volatility alone can boost the option’s price. This dual opportunity is where the big money trades happen.
Key Takeaways
To wrap up, the takeaway is this: buying low-implied volatility options is only worthwhile if you’re anticipating an increase in implied volatility alongside price movement. Details like this separate successful strategies from oversimplified myths. In part two, I’ll discuss why selling high-implied volatility options isn’t always the best move.
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