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 forecast of how much a stock is expected to move over a given period. It is expressed as an annualized percentage. Unlike historical volatility (which looks backward at actual moves), IV is forward-looking and is embedded in the current price of every option. Higher IV means options are more expensive; lower IV means they are cheaper.

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

As a premium seller, you want to sell options when they are expensive and let time decay work in your favor. IV tells you whether options are expensive or cheap relative to the stock's normal range. Selling puts during high IV means you collect more premium for the same strike and expiration. When IV eventually contracts (drops back toward its average), the option loses value faster -- and since you sold it, that benefits you.

IV Rank vs. IV Percentile
IV Rank measures where current IV falls within its 52-week high-low range: (Current IV - 52w Low) / (52w High - 52w Low). IV Percentile measures what percentage of days in the past year had lower IV than today. Both help you determine if IV is relatively high (good time to sell) or low (caution). An IV Rank above 50% generally signals a favorable environment for premium selling.

The Volatility Smile and Skew

If you look at implied volatility across different strike prices, you will notice it is not uniform. OTM puts typically have higher IV than ATM options -- this is called 'volatility skew.' It exists because the market prices in crash risk. For wheel traders, this skew actually works in your favor: the OTM puts you sell carry a slight IV premium, meaning you collect a bit more than a purely theoretical model would suggest.

High IV Environment
  • +Options premiums are rich
  • +Good time to sell puts and calls
  • +Wider expected moves priced in
  • +IV Rank above 50%
  • +Often occurs around earnings, macro events, or market fear
Low IV Environment
  • –Options premiums are thin
  • –Less rewarding to sell premium
  • –Narrower expected moves priced in
  • –IV Rank below 30%
  • –Often occurs during calm, trending markets

Practical IV Rules for the Wheel

  1. Check IV Rank before every trade -- aim for stocks with IV Rank above 30%, ideally above 50%.
  2. Understand that high IV often coincides with fear and falling prices -- make sure you are comfortable owning the stock at your strike.
  3. Be cautious selling into earnings unless you specifically want assignment risk from a potential gap down.
  4. After you sell a put, IV contraction (crush) will accelerate your profit even if the stock does not move at all.
The Earnings Trap
IV spikes before earnings because a big move is expected. After earnings, IV crashes (the 'IV crush'). Selling puts into earnings can be lucrative if the stock behaves, but a gap down through your strike can result in immediate, large assignment losses. Only sell into earnings on stocks you genuinely want to own at a discount.
Key Takeaways
  • •Implied volatility reflects how expensive options are -- higher IV means richer premiums for sellers.
  • •Use IV Rank (above 50% is ideal) to time your premium-selling entries.
  • •IV contraction after you sell is a tailwind -- the option loses value even without a stock move.
  • •Be cautious with high IV around binary events like earnings.
Quick Check
1/3

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

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