Implied Volatility Curves

Implied volatility curves plot the option ‘skew’ by displaying the implied volatility value at each delta level of either the maturity or expiration. Different curve shapes like smile, smirk (reverse skew) and forward skew can be good indicators of market sentiment in terms of option volatility demand. Additional layers of analysis can applied by adding multiple maturity types or multiple expirations and viewing the curve historically versus the current levels.

Open

Enter in a US or Canadian equity ticker or index symbol in the search for symbol box or used the symbol browser tree to search for your desired instrument. Note, IV Index data is only available for US and Canadian stocks and indexes that have listed options. Once the underlying is selected you will see the ticker display in the right side of the dialogue. To remove the symbol, simply click the 'x' to the right of the ticker.

Open

(Tip: When using the symbol tree, the Stocks → By Exchange, Index, Sector etc. branches have ‘Options’ leaves that only display underlying securities that have listed options)

Now you can opt to plot the Implied Volatility Curves by either maturity or expiration via the tabs found below the ticker and chart type.

By Maturity

Using the ‘By Maturity' tab, you can plot one or all of the virtual option expiration period’s current volatility curves. You can also compare the current session’s curve to a selection of pre-set days back or a custom date using the date picker (calendar icon).

To compare the current term structure to a date in the past, use any or all of the preconfigured date options: 1D (one day back), 1W (one week back), 1M (one month back), 3M (three months back) and 6M (six months back). Use the ‘Custom Date’ option to select a specific day.

The last customization that can be applied is the type of curve that will plotted. The default ‘Call/Put Slopes’ curve will use the 5 - 45 delta put IV index values, the 50 delta call and put IV average, and the 45 - 5 delta call IV index values. The ‘Call/Put Average’ curve will plot the average of the call and put IV index at each delta ranging from 5 - 95. The ‘Calls’ curve will plot only call delta IV indexes from 5 - 95 and the ‘Puts’ selection will only plot the put delta IV indexes from 5 - 95.

Once all selections have been made, click insert and view the volatility curve by maturity. Implied volatility is plotted on the y-axis and the delta values are plotted along the x-axis.

In the image below, AMD is exhibiting the reverse skew or smirk as the put implied volatilities are at higher levels relative to those of the calls. Furthermore, AMD’s 30 day maturity implied volatility curve has ‘come in’ considerably since 4/28/20. While AMD has maintained a similar skew structure (smirk), an overall decrease in volatility for this underlying and maturity (ATM volatility decreased from 65.9 to 55.3) has taken place over the last three months.

By Expiration

Using the ‘By Expiration’ tab will allow you plot an underlying’s volatility curves using option expirations. When ‘Expiration’ is selected, a drop down menu will be available where you can select a desired monthly or weekly expiry. Multiple expirations can be individually selected (check box) or you can select ‘All’ for all expirations, ‘Monthly’ for all monthly expirations and ‘Weekly’ for all weekly expirations. Use clear to remove your selections.

To compare the volatility curve to a date in the past, use any or all of the preconfigured date options: 1D (one day back), 1W (one week back), 1M (one month back), 3M (three months back) and 6M (six months back). Use the ‘Custom Date’ option to select a specific day.

Now you can select the curve type to be used for the expiration(s). By default the ‘Call/Put Slopes’ curve is selected and uses the 5 - 45 delta put IV index values, the 50 delta call and put IV average, and the 45 - 5 delta call IV index values.

Once all selections have been made, click insert and view the volatility curve by expiration chart. Implied volatility is plotted on the y-axis and the delta values are plotted along the x-axis.

In the image below, the USO 7/29/2022 is exhibiting a 'forward curve' or inverse skew where call deltas are pricing in higher volatility levels than puts. This structure is more common for commodity markets, as upside protection can trade at higher premiums than downside puts when events like supply disruptions can drive the underlying commodity price higher.

Volatility Forecasting

Visually plotting the implied volatility curves, or skew, can enable the trader or investor to better view areas of high and low volatility and then take action depending on the strategy or current position. Once the areas with the highest and lowest market risk are plotted (highest IV levels and lowest IV levels respectively), that is where you can search for potential opportunity. If a position has been taken in one contract that is nearing expiration and the trader is looking to roll it to the next expiration, they can look to the skew of the new expiration and pick the option that best fits their needs. Most non-commodity based stocks or ETFs tend to exhibit reveres skew. If an investor is bullish on the underlying they can look to trade a short put, short put spread or long combo to take advantage of the inflated delta IV levels. If the underlying is exhibiting inverse skew, investors can look to sell covered calls, call spreads or short combos using strikes that have high premium levels due to concern of a ‘melt up’.