According to tastytrade, there’s always an expected range for your listed prices to reach in any timeframe. When you know the implied price range of the assets you trade, you can determine if prices can reach your mark for a profit or not.

Additionally, the expected volatility within an expiration date tells you when to enter or exit a position. Here’s a look at how implied volatility (IV) works and why options traders use it to aid their decisions.

Volatility and Its Impact

The impact of volatility within your trades depends on if you are buying or selling a position. When volatility is high, those entering the market will favor better because the ranges of prices they encounter are predetermined.

Entering the market when volatility is low isn’t favorable to some investors because IV can shift higher once they enter their positions. The benefits or losses occurred during volatility changes depend on if you have a buy or sell position.

Overall, the higher volatility is, the higher the premium to trade is. The lower volatility is, the less you pay.

What Are the Challenges In Using IV Levels?

The challenge of trading with the help of implied volatility is in timing your market movements. Though a predicted-price range is a reliable tool, when or where prices will spike and fall isn’t as simple to see.

Your IV, being almost necessary for options, is the data your broker gives you without you requesting it. In finding when prices will spike or fall, however, be sure to also keep tabs on your expiration dates.

Volatility and Its Influence On Prices

Volatility is a measurement that determines a range rather than a single price. The rate of your IV reading tells you how likely drastic movements are or how unlikely.

This means that low volatility is found in stable markets, which is when prices move but in steady intervals.

High-IV levels suggest that prices will swing within a wider range whether it’s in a down or uptrend. In this sense, your IV is the measurement of the likelihood of wide or slim movements from current, listed prices.

Inflation, Deflation and Why They Matter

The implied volatility of the options you trade ultimately tells you whether the current prices you find listed are inflated or deflated. In general, deflated prices happen when you determine that prices are lower than market volatility.

Likewise, inflated prices are those that are higher than where market volatility actually stands. Knowing if your prices are inflated or deflated prior to taking a position will help you to minimize your risks. You can also use the measure of inflation or deflation to determine when to exit a position.

Volatility can certainly be profitable when you time the changes of the market perfectly. When you can’t measure things with such exactness, look to your listed IV to establish a range regarding the prices you expect to trade with.