One of the most important secrets for pulling profits out of the markets on a regular basis is called Implied Volatility. Implied Volatility is computed value, that has to do with the option itself, rather than the underlying asset. To take advantage of implied volatility, you must calculate volatility ratios. The 20 day ratio is calculated as 1 day implied volatility divided by 20 day statistical volatility.


When the implied volatility of an option stretches very far above or below the actual statistical volatility, statistical volatility acts like a rubber band, pulling the implied volatility back towards it.

 
  

 
 

One of Bruce Marshall's key indicators is the Implied Volatility Indicator in Thinkorswim.

 

From Thinkorswim Learning Center: 

"The Implied Volatility study is calculated using approximation method based on the Bjerksund-Stensland model. This model is usually employed for pricing American options on stocks, futures, and currencies; it is based on an exercise strategy corresponding to a flat boundary. For more information on that, refer to sources mentioned in the "Further Reading" section."


Historical vs. Implied Volatility

Bruce uses the comparison between historical and implied volatility heavily in his trading. He likes to compare the historical and implied volatility to determine which options strategy is best to use. He uses historical volatility to understand what the range of volatility is on an individual stock or index. He uses implied volatility to see where the volatility is for the stock or index in relation to the historical volatility. If it’s near all-time highs, or the top of the range, it’s a better opportunity to sell premium versus buying it.

 
 
 
 

 
 
 

 

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