Stock Option Investment Advice

SIV – Stock Implied Volatility and Stock Earnings

Q: What is the SIV data and search parameter that PowerOptions provides?

A: As you know, historical stock volatility can be measured in many ways: 20-day volatility, 50-day volatility, 100-day volatility, etc.

Rather than use the historical trading range of the stock to measure volatility, investors will use the SIV. The SIV is the average Implied Volatilities for calls and puts for the near months expiration’s. This gives the investor an idea of the average value of the near term ITM – OTM calls and puts on the stock.

This is a very useful measure to use during an earnings season. For example, you may be tracking an option that you are looking to sell which has an Implied Volatility (IV) of 0.65. The underlying security might not have had a lot of movement recently, so the 50-day Historical Volatility (HV) might be right around 0.50.

When you compare the IV / HV ratio, to see if the option is under or overvalued, you would have: 0.65 / 0.50 = 1.30. This means that the option would be considered 30% overvalued compared to the Historical Volatility.

However, although the stock has not fluctuated in price recently we are nearing an earnings event, so the near term options will be inflated. Although it appears the option is overvalued compared to the Historical Stock Volatility, if we compared to IV to the SIV we might have:

IV / SIV = 0.65 / 0.68 = 0.96

This means that the particular option we were researching is actually 4% undervalued, compared with the average Stock Implied Volatility (SIV). So, the option is inflated compared to the Historical Volatility, but not as inflated as the other options around it in the same expiration cycle.

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