Implied Volatility Skews Trading Strategies in Interactive Brokers (IBKR)

Did you know that in the market there are as many values of implied volatility as many options strikes available on any given underlying security? Now you may well not be aware of this, but this is an important piece of information for anyone serious about making money with options trading.

In fact, the implied volatility is a key part of the price of an option. Its fluctuations impact on the options premiums that you must pay to purchase options. And each option traded in the market can be affected by IV in a different way.

Options traders can take advantage of these fluctuations by purchasing options with lower values of implied volatility and selling options with higher values of IV and try to make a profit from the difference between the two. These discrepancies can be used to create so called Implied Volatility Skews trading strategies which can be common especially during times of high market volatility.

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How to Check Implied Volatility Values for Each Option

In the video above, I explain how you can check the implied volatility values for every single option inside the Interactive Brokers Trading Platform (IBKR). This works pretty much the same for any broker, as you will have the information about IV on the screen with the options chains/table.

These volatility values for each option in the market are not standalone values but are all connected to the main volatility in the market measured by the Options Volatility Index (VIX). The VIX, also known as the Fear and Greed Index, fluctuates daily depending on the future expectations of all operators.

This is a cyclical index meaning that movements of the index in one direction are always followed by movements in the opposite direction. Normally the VIX Index will rise quickly as the volatility in the market increases (that is why it is referred to as the Fear and Greed Index). Instead, when the volatility in the market declines the Index will decrease gradually and steadily. You can have a look at the VIX chart and its behavior in the video.

On the 2nd of August 2023 there is a big decline in the market which is due to the news related to the downgraded rating of the US economy. These news determine a huge rise of the Volatility Index (VIX) in a time when volatility was on average at extremely low levels. Now this overall increase in IV is going to be reflected in the premium of all options strikes available, but in a different way depending on the options moneyness (options at-the-money, in-the-money, out-of-the-money), the options open interests and the volume traded for each individual strike price.

Look for Volatility Skews on the Options Table/Chain

For instance, if you look at the options table for Microsoft Corp (MSFT) and pick the options expiring on the 16th of February (look at the table in the video), next to each strike price for both calls and puts you have the information of the implied volatility. This is presented as a percentage. For example, the $325 strike price has an IV value of 27.1% for the call options and an IV value of 26.9% for the put options. And this values change in real time when the markets are open.

You can clearly see on the options table screen that there is a different value of implied volatility for each available option. Once you are aware of this, you can start looking for volatility skews between options at different strike prices and/or different expirations. It means profiting from the IV discrepancies between the options you buy and the options you sell. In the example of Microsoft (again you can see it from the video) the $320 call option has an unusual value of IV which is lower than the $315 and $325 strike prices making it a possible candidate for a Volatility Skew trade.

My final recommendation now that you are aware of the possible presence of these volatility skews is to have a closer look at the VIX Index and the IV values for each individual option. This can help you find a trade with good chances of success.

I’ll see you on my next release of the Options Trading Diary.