I recently wrote a blog titled The Many Faces of the S&P 500, where I outlined the varying ways you can track the most popular Index on the planet. Today is a companion piece that will give implied volatility (IV) the same treatment.

ThinkorSwim has a variety of indicators revolving around implied volatility, and its options chain is littered with different ways to track this much talked about metric.

What is Implied Volatility?

To better understand the differences between the many IV numbers in ThinkorSwim, you first need to understand precisely what it’s measuring. I have a handful of definitions for IV but this one is the most appropriate for today’s discussion:

IV reflects demand for an options contract.

Easy enough, right?

And since demand is what drives price, we could modify the phrase, like so:

IV reflects the price of an options contract.

Okay, so??

When the price of an options contract is cheap, IV is low. When the price is expensive, IV is high. It’s as simple as that.

Numbers, Numbers, Everywhere!

The theory is easy enough, but some rookie traders get lost in the application. If they’re using ThinkorSwim, then they’ll see IV numbers all over the screen. And they’re not all the same. So which do you use, and why are there so many to begin with? Listen up, and I will reveal the mystery.

If IV reflects the price of an options contract, and if there are dozens of calls and puts with a handful of different expiration dates, then wouldn’t there be a lot of implied volatility numbers?

Yes. In fact, there is one IV for every single contract. That’s why you can plot IV as a column heading in the options chain. Take a look here:

Will the demand for every single option contract be the same? No. Usually, the demand for out-of-the-money puts is higher than that for out-of-the-money calls. As a result, you will see OTM puts trade with higher IV levels than OTM calls. This is known as Volatility Skew.

For example, with the ROKU options chain graphic above, the 110 put is far OTM and has an IV of 81.96%. In contrast, the $200 call is far OTM but only has an IV of 68.37%.

Months and Market Efficiency

To get a better sense of the overall level of implied volatility, traders often look at the average IV. With any calculation trying to capture the average of a data set, you have to decide what to include in the formula. If I’m trying to measure the implied vol for Roku options, do I use every single listed option or just the ones that expire in a specific window?

By default, TOS will provide the average IV for each expiration. That is what all those percentages are on the right-hand side of the options chain.

The number in parentheses is the expected move calculated from the implied volatility percentage. For instance, November ROKU options trade at an IV of 106.28%, which translates into an expected move of $25.67. Since the stock is currently trading at $146.86, the expected range between now and Nov expiration is $121.19 (146.86 – 25.67) to $172.53 (146.86 + 25.67).

The IV is different for each month because the demand for options in each cycle varies. The reason November contracts (blue arrow in graphic) trade with such a high IV (106.28%) is that there is an earnings announcement looming on November 6th. And since ROKU stock has a history of huge gaps, traders are willing to pay a lot more for options ahead of the event.

By contrast, the Jan 2022 options are only trading with an IV of 57.54% because Roku’s volatility will average out to a much lower level over time. In part because implied vol experiences mean reversion, and in part, because Roku will mature as a company likely resulting in a more stable stock price in the long run.

IV Rank

Most coaches, including myself, use the IV Rank indicator on the price chart when analyzing vol instead of diving deep into the options chain. The first reason is that it’s handy. I spend the majority of the time looking for trades using price charts, so it’s convenient to have the IV viewable alongside the price action.

Both the IV Rank and ImpVolatility indicators use a 30-day reading of implied vol. That means the number should closely track whatever the 30-day expiration is on the options chain. Here’s what I mean.

For Roku, ImpVolatility is 85% in the indicator (see white box in above graphic). If I flip over to the options chain, guess what the IV is for the 29 Nov 19 Weeklys options is that expires in approximately 30 days? 87%. It’s virtually the same.

Hopefully, that clears up any confusion.

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