Trading Option Volatility (Trading Tool) - YouTube

Option pricing is affected by several factors  including the price of the underlying interest  

rates and volatility. Volatility is a metric for  the speed and movement of the underlying assets  

and with all things being equal such as strike  price and underlying price. The higher the  

volatility the higher the price of the option in  this lesson we will go over the trader workstation  

volatility lab tools to analyze volatility  and how to enter an order using order types  

designed to trade options according to volatility  levels let us start by bringing up the volatility  

lab click on the new window button to the upper  left of mosaic and scroll down to the option  

tools section select advanced option tools  and then volatility lab the volatility lab  

will populate with the active ticker you may  change the symbol by clicking on the drop down  

menu in the upper left hand corner on any of  the tiles the volatility lab consists of three  

separate tabs offering tools to analyze implied  volatility historical volatility and by industry  

comparison the tabs contain similar tools but with  different settings to give the user a variety of  

data in one area let's walk through each tab the  implied volatility tab is comprised of five tools  

they are implied volatility volatility profile  multi-expiry skew time-lapse skew and open  

interest the implied volatility tool is located at  the top left corner of the screen this tool gives  

you a look-back view of implied volatility for all  available expirations for a ticker symbol click on  

the plus sign next to last trading days to select  the expirations you want to view now select the  

time period you can choose one week one two or six  months one year or create a custom period move the  

cursor in the chart over the day and you will  see the implied volatility for each expiration  

for that day use this chart to view whether  implied volatility was relatively high or low  

during any given past period you can see the price  of the underlying symbol in the background uses  

a grayscale directly below implied volatility is  the volatility profile tool the volatility profile  

tool shows the implied and historic volatility  side by side you can deselect either implied  

volatility or historical volatility by clicking on  the box next to them click the gear icon to change  

the volatility period from annual to daily or use  the profile to compare the implied volatility to  

industry comparisons by changing to comparison  mode once in comparison mode click on the plus  

sign on the left hand side to select the companies  you'd like to compare or enter a symbol of your  

own choice in the top right corner of the screen  is the multi-expiry skew viewer this displays the  

premium paid for options at each expiration click  the gear icon to choose between strike price or  

moneyness which is the position of the strike in  comparison to the underlying in the x-axis display

choose which expirations by selecting  the plus sign in the upper left hand side  

next to last trading days you can select which  date you would like to view as well as choose the  

range of strikes you want charted next we have the  time lapse skew tool like the multi-expert skew  

viewer the x-axis can be adjusted to show either  strikes or moneyness by going into the gear icon  

this tool is helpful in charting how the price  skew has evolved over a selected time period  

in order to possibly identify a catalyst  that caused a skew to occur or disappear  

such as an earnings event or news story choose  between several predefined periods or enter a  

customized date setting by clicking on the plus  sign in the top left corner next to days in the  

bottom right hand corner is the open interest  tool which when clicking the gear icon allows  

you to choose between open interest and option  volume as well as view call and put together  

or broken out into separate charts choose which  exploration you want to view by clicking on the  

plus sign in the top left corner and each  will be assigned a color in the bar graph  

open interest and volume are helpful to see  overall interest in an expiration and strike  

now let's look at the historic volatility tab  by clicking on it at the bottom of the window  

the historical volatility tab consists of three  tools historical volatility which is the same as  

implied volatility but set to show historical  versus implied the volatility profile tool and  

the time lapse tool each tool can be adjusted as  the user sees fit to get the desired time period  

and display the third tab is the industry  comparison tab which consists of five tools  

custom comps implied volatility comparison  underlying price tool sku comparison and  

the volatility profile comparison the custom comps  tool is pre-loaded with industry competitors and  

you can add in any symbols you'd like it allows  you to compare the underlying price implied and  

historic volatility as well as the ratio of the  implied volatility over the historical volatility  

check the next box to each symbol to see  it populate other tools within the layout  

the implied volatility comparison tool is the same  viewer as the implied and historical previously  

discussed but with the settings set to comparison  mode the chart displays the implied volatilities  

of all the competitors against the underlying  you chose so that you can easily compare  

implied volatilities of each company and  use it in your analysis in the top right  

hand corner is the underlying price tool this  displays each competitor's ticker over time  

choose one week one month two months six months  a year or choose custom entry the final two tools  

the sku comparison and volatility profile  comparison were discussed earlier in the lesson  

instead of showing multiple expirations they  show multiple underlyings so that you can further  

compare the group of stocks now that we've gone  over how to use the volatility lab to research  

implied and historical volatility trends let  us bring up the volatility trader by going into  

the new window area scrolling down to advanced  option tools and clicking on volatility trader  

volatility trader displays the bid and ask  prices in volatility terms instead of premium  

an option trader may want to tailor an order to  trigger only if implied volatility is above or  

below a specific level enter a symbol select  option and choose a strike and expiration  

the default order type is vol for volatility and  once an order is created you can select either  

annual or daily to display the volatility of  the order in the column labeled full type the  

volatility used to compute the limit price of  the order is displayed in the volatility column  

and can be adjusted to change the limit price  you may also adjust the limit price and see the  

change to volatility underneath the volatility  column let's increase the volatility and see  

how it affects the limit price now we will lower  the volatility and the limit price will be lower  

let's enter a buy order with a limit price below  the bid by setting the volatility level lower than  

the bid and hit transmit the order confirmation  screen displays the order in volatility terms  

hit transmit to make the order active ibkr  offers several types of pegged volatility  

orders including peg to primary peg to  midpoint peg to market and peg to surface  

we'll now place a peg to primary volatility order  by clicking on the option line and setting the  

order type to peg prime fall a value will appear  in the offset amount column this is expressed in  

volatility terms and can be adjusted to be more  or less aggressive depending on the value entered  

in peg to primary orders the offset is tied to  the bid for buy orders and ask for sell orders  

i will adjust up to 11 and you will see the limit  price increase click transmit to send the order  

all of the volatility based orders can be  accessed in classic tws as well without  

bringing up the volatility trader as you can see  volatility is an important part of option pricing  

i hope you enjoyed this lesson on the  tws volatility lab and volatility trader