Learn/The Greeks That Matter/Lesson 3
Lesson 3 of 5

Implied Volatility -- When to Sell Premium

What Is Implied Volatility?

Implied volatility (IV) is the market's guess at how much a stock will move over a given period. It's expressed as an annualized percentage. High IV means the market expects big moves, and option prices are pumped up. Low IV means calm expectations and cheap options. As a premium seller, you want to sell when IV is high -- fat premiums -- and profit as IV drops back to normal.

Expected daily move from IV
Expected Daily Move ~ Stock Price x (IV / sqrt(252)) | Example: $100 stock, 30% IV -> ~$1.89/day

Why IV Matters for Wheel Traders

IV is what makes the same strike worth $1.50 one week and $3.00 the next. When IV is elevated, you're collecting premium for moves the stock probably won't make. That's the edge. When IV eventually drops (and it usually does -- volatility mean-reverts), the option price collapses even if the stock doesn't move. You sold at $3.00, IV drops, and you buy it back at $1.50. That's the IV contraction play on top of theta decay.

IV Rank vs. IV Percentile
IV Rank tells you where current IV sits in its 52-week high-low range. IV Rank of 70 means IV is 70% of the way between its yearly low and high. IV Percentile tells you what percentage of days in the past year had lower IV than today. Both are useful, but I mainly use IV Rank. Above 50 = premiums are juicy. Below 30 = premiums are thin, maybe wait for a better entry.

The Volatility Smile and Skew

Here's something cool: if you look at IV across different strikes, it's not flat. OTM puts have higher IV than ATM options. This is called 'volatility skew' -- the market charges more for downside protection because people fear crashes. For us, this is actually a good thing. The OTM puts we sell in the wheel carry a slight IV premium, meaning we collect a bit more than a flat-IV model would predict.

High IV Environment
  • +Premiums are fat -- this is prime selling time
  • +IV Rank above 50%
  • +Bigger expected moves are priced in
  • +Often happens around earnings, Fed meetings, or market selloffs
  • +Sell premium here and let IV contract work in your favor
Low IV Environment
  • –Premiums are thin -- less reward for the same risk
  • –IV Rank below 30%
  • –Smaller expected moves priced in
  • –Happens during calm, grinding-higher markets
  • –Be selective or wait for a volatility spike

Practical IV Rules for the Wheel

  1. Check IV Rank before every single trade. I won't sell if IV Rank is below 30% unless I really want to own the stock. Above 50% is ideal.
  2. High IV usually means the market is scared. Make sure you're comfortable owning the stock at your strike -- fear creates opportunity, but also real risk.
  3. Be careful selling into earnings unless you specifically want to own shares through a potential gap down. I avoid it 90% of the time.
  4. After you sell, IV contraction accelerates your profit. You get theta decay AND IV crush working for you. Double tailwind.
The Earnings Trap
IV spikes before earnings because a big move is coming. After earnings, IV collapses. Sounds great to sell into, right? The problem: AMD can easily gap 10-15% on earnings. If you sold a put at a 'safe' delta and the stock gaps down 12%, you're deep in the hole. I got caught on this early in my trading. Now I close positions before earnings or avoid selling into them entirely.
The short version
  • •IV tells you how expensive options are. Higher IV = richer premiums for sellers.
  • •Use IV Rank to time your entries. Above 50% is the sweet spot -- below 30%, be patient.
  • •IV contraction is your friend. Sell when IV is high, profit as it drops back to normal.
  • •Earnings inflate IV but also bring gap risk. Be very careful with earnings plays.
Quick Check
1/3

A stock's IV Rank is 75%. What does this mean?

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