Applications of Implied Volatility

How is this IV used in trading? To begin with, we can compare the IV figure to the historical volatility. Also, we can examine the history of the IV itself to see how its current value differs from its values in the past. These comparisons will suggest if the option is currently overpriced or underpriced.

As a trading tool, IV proves particularly useful in selecting calendar spreads. To evaluate a possible calendar spread trade, compare the IV of two call (or put) options that have the same strike price but different expiration months. If the front-month option has a higher IV than the distant month, this is called a volatility skew. Such skews are important in initiating a calendar spread by buying the relatively ...

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