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Comparing Implied Volatility and Historical Volatility During Earnings Season

When selecting stocks and options for covered call writing and put-selling we factor in volatility, both implied and historical. Historical Volatility (HV) is the actual volatility of a security over a given time period. HV is calculated by determining the average deviation from the average price based on one standard deviation (expected to be accurate 67% of the time).  Implied volatility (IV) is a market forecast of the underlying stock’s volatility (in either direction) as implied by the option’s prices. It is also usually based on one standard deviation and a one-year time frame.

How volatility is factored into our option-selling decisions

IV is a critical factor in determining the amount of premium we receive when we sell an option. In essence, we are selling volatility. The higher the IV, the greater the premium but the more risk we are subjected to. Changes in IV are measured by the Greek Vega. It is defined as the amount an option price is expected to change for every 1% change in volatility. We can quantify the amount of volatility risk we are incurring by setting a goal for our one-month (feel free to change the time frame) contracts. I use 2% – 4% as a guideline for near-the-money one-month strikes. This will restrict the amount of volatility risk I am incurring. In bull market environments, I will raise that goal level a bit and in bear markets I may lower the parameters.

We factor in historical volatility through the eyes of beta. This is a measure of market risk or volatility compared to the market as a whole. It is usually compared to the S&P 500 over a one-year time frame (this is what BCI uses) but the benchmark and time frame will vary from vendor to vendor. Beta stats are highlighted in our Weekly Premium Member reports as shown in the screenshot below:

volatility and option-selling

Beta Stats in Premium Reports

Which is more significant to option-sellers…IV or HV?

Over the years, I have stressed that IV is a primary factor and HV is a secondary factor in our option-selling decisions. We are incurring short-term obligations and need as much feedback regarding near-term price movement as possible. If there are market forces or events that will be impacting our underlying’s price movement, we need to know that information. It is more essential to have that data than the projected price movement over a much longer time frame. Stated differently, the future is more significant than the past although I have no issue with viewing historical data as well.


IV and HV during earnings season

To make this point, let’s view a comparison chart taken from for Apple Computer (AAPL). The chart covers the following earnings reports:

  • 1/27/2015
  • 4/27/2015
  • 7/21/2015
  • 10/27/2015


volatility and covered call writing

IV and HV Comparison Chart for Apple Computer


Notice that during earnings season (pink fields) there are large discrepancies in IV and HV. Now this is no shock to us as we would expect volatility to increase as investors await a positive or negative report. However, it does point out that if there is an event on the horizon that may impact our share price, it will influence our investment decisions and therefore represents data we want to have at our disposal. IV is much more likely to supply that information than is HV.



One of our BCI mission statements is to have a system that enhances returns to the highest possible levels and reduces risk while simultaneously remaining user friendly and time efficient. This includes prioritizing the parameters we include in our screening process. This article is intended to make a case that implied volatility should be stressed more than historical volatility as they relate to short-term option-selling.


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Market tone

Global stocks declined this week as five members of the US Federal Reserve’s rate-setting committee suggested that a rate hike could come as early as April while Federal funds futures are pricing in a rate hike in late 2016 to early 2017. The Chicago Board Options Exchange Volatility Index (VIX) moved up to 16.15 from 14.74 last week. This week’s reports and international news of interest:

  • Five members of the Federal Open Market Committee (FOMC) suggested the next hike in policy rates should come at the April meeting
  • Oil prices declined, the dollar strengthened as equities declined
  • Fed Chair Janet Yellen said at her press conference earlier this month that caution is warranted in removing monetary accommodation
  • Strong readings from the Empire State, Philadelphia and Richmond Fed surveys sparked hope that the recent decline in US manufacturing has come to an end, however, slight rise in Markit’s US manufacturing purchasing managers’ index muted that optimism. The index rose less than expected, to 51.4 in March from 51.0 in February. Economists had expected a rebound to 52.4
  • Ifo, the German economic institute, released its monthly business climate index on Tuesday. The index rose to 106.7 from 105.7 in February, beating estimates of 106. Think tank ZEW’s gauge of investor sentiment improved to 4.3 in March from 1.0 the prior month
  • Hungary trimmed its policy rate to -0.05% from 0.10%. Hungary is the first emerging market to adopt negative rates, joining the likes of the European Central Bank, the Bank of Japan and the Swiss
  • Marcelo Odebrecht, the recently convicted CEO of construction firm Odebrecht SA, is said to be cooperating with Brazilian authorities in connection with the “Car Wash” probe. Odebrecht apparently kept a list of around 200 politicians who allegedly took bribes. The explosive news further pressures embattled President Dilma Rousseff, who is facing impeachment
  • Sales of existing homes fell 7.1% in February, while sales of newly constructed homes rose 2%. High prices and low inventories contributed to the decline in sales of previously owned homes
  • Orders for durable goods fell 2.8% in February while January orders were revised lower to 4.2% from 4.9% previously


  • Stock exchanges in much of Europe, Canada, Australia and New Zealand will be closed on Easter Monday March 28th
  • The US personal consumption expenditures price index is released on Monday, March 28th
  • Eurostat releases the eurozone consumer price index on Thursday, March 31st
  • The Bank of Japan releases its Tankan report on Friday, April 1st
  • Global purchasing managers’ indices are released on Friday, April 1st
  • The US employment report for March is released on Friday, April 1st
For the week, the S&P 500 declined by 0.67% for a year-to-date return of – 0.39%.


IBD: Confirmed uptrend

GMI: 5/6- Buy signal since market close of March 2nd

BCI: Moderately bullish, favoring out-of-the-money strikes 3-to-2

The S&P 500 is currently in an uptrend (higher highs and higher lows) while the VIX (CBOE Volatility Index) is at 14.74.
The near term market trend is BULLISH

Wishing you the best in investing,

Alan ([email protected])


About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

18 Responses to “Comparing Implied Volatility and Historical Volatility During Earnings Season”

  1. Tom March 26, 2016 12:02 pm #

    You have probably addressed this subject somewhere but I haven’t been able to find the answer.

    The Blue Collar reports are made available to its members on the weekend and it is also the time that I access the option chains and use the basic calculator. It seems though that the information I gleaned from doing this has changed by the time I want to place an order on Monday morning.

    Should I access the option chains and use the basic calculator just prior to placing an order on Monday morning?

    Thanking you in advance for your response.


    • Alan Ellman March 26, 2016 12:05 pm #


      Selection of stocks can take place over the weekend and many of us also check option chains to get an idea of time value returns. Actual use of the calculator and option chains for purpose of placing trades should occur just prior to placing those trades during hours when markets are open.


  2. Barry B March 26, 2016 11:17 pm #

    Premium Members,

    This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor Premium Member website and is available for download in the “Reports” section. Look for the report dated 03/25/16. For your convenience, the link to log into the Premium Member website is:

    Be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar Investor YouTube Channel. For your convenience, the link to The Blue Collar Investor YouTube Channel is:


    Barry and The Blue Collar Investor Team

  3. Alex March 27, 2016 5:22 pm #

    Can anyone attest to Market Trend Signal?

    It seems like a scam on the surface but I feel there maybe some value.

    • Jay March 28, 2016 3:59 pm #


      I am not familiar with the folks at the link you posted but I have seen some like it and they are certainly effective – though provocative – marketers :).

      In a couple of the “free” webinars I have listened to – they are really just “infomercials” – I concluded they were packaging and selling basic Technical Analysis I could get for free on any charting site.

      If you look at the green and red arrows on the graph in your link what do you think happened at each of those junctures that made those guys so smart :)? Seems to me a simple moving average line was crossed from above or below.

      I like the 50 day moving average on the S&P for SPY and S&P index fund 401K equivalents to swing trade off. The past year that had a lot of whipsaws but if you let it confirm in each direction a day or two first you can minimize some of that.

      The intent, of course, of any timing system is to be out at the worst and in at the best of times.

      I suspect the one I just outlined would work as well as any you might pay for. Test it on your own charts before listening to me! You could even get fancy and use SH instead of being in cash when you are out. Or SSO when you are in and SDS when you out. Variations on the strategy are a function of risk tolerance and understanding the instruments. – Jay

  4. Alex March 28, 2016 11:08 am #

    We say that selling calls in the money strikes are the most conservative approach , however this is granted the fact that you still bought the underlying and a lower price.. what I mean is:

    for example, today MCD is trading at 123.29$ , the (ITM) MCD Apr 15 2016 123 Call is at 1.97$ , so if I sell this call I get 197$ per contract ok?
    However, if I was to buy the stock say today, at 123.29$ and sell the 123 call, that wouldn’t make much sense would it? I’d say it would make sense if I bought MCD at a cheaper price, earlier…

    what do you think?

    kind regards!

    • Alan Ellman March 28, 2016 11:18 am #


      In my view, the decisions we make today must be based on current data. If MCD is trading @ $123.29 today, that is what we base our decisions on. If we bought the stock originally for $100.00 or $150.00, we still own a stock worth $123.29 at this point in time. Using old data will only cloud our decisions. If our current market outlook is bearish we would sell an in-the-money call based on the current price.


  5. Alan Ellman March 28, 2016 5:31 pm #

    New Put Exit Strategy Flow Charts now available:

    Premium members,

    At the request of several of our members, we have created two put exit strategy flow charts available for free to our premium members. Login to the member site and go to the “resources/downloads” section on the right side and scroll down to “P” as shown below. CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.


  6. Nate March 30, 2016 12:27 am #

    I have had an issue from time to time where I buy an equity and it starts dropping quickly before I can sell an option at the calculated price. This happened with MXL recently for me. I had a 2.5% return calculated when I put in the option sale. As I was playing the bid-ask spread the equity was dropping. It went down to 1.5% rapidly. I adjusted my option price to 2% in hopes it would come back up during the day. Near the end of the day the sale never went through and the option return was near 0% so I quickly put in an order for the 17.50 ITM for a breakeven and perhaps get a double later giving some profit.
    Bought at 18.50, the price was about 17.90 when I sold 17.5 option for a $1. The idea was since the price didn’t recover by the end of the day I wanted to lock in protection against possible further decline the following days. A similar thing happened with FB a few months ago.

    My question to you is how do you usually handle an equity decline before you can get your option sale in at the desired price and your potential profit is shrinking?

    Also I try to avoid market opens and closes to limit the volitility. Is there really any other way to help prevent these things from happening?

    Thanks, Nate

    • Alan Ellman March 30, 2016 11:12 am #


      Trading between 11 AM and 3 PM ET will usually eliminate market volatility attributed to institutional computerized trading.

      Secondly, if we are about to enter several positions, buy Stock #1 and then sell Option #1, then buy stock #2 and then sell option #2 rather than buying all stock shares and then start selling the corresponding options.

      Some brokerages also have buy/write combination forms where we enter a net debit order to assure a return goal if executed. This is instead of legging-in (my preference). The former is better if we can’t be in front of our computer and want to execute a trade…it may also save some commission fees but will weaken our ability to leverage the Show or Fill rule.


  7. Phil March 30, 2016 1:16 am #


    Using the latest Weekly Stock Screen and Watch List (3/25/2016), the “Weekly Summary” indicates the following:

    BCI: Moderately bullish, favoring out-of-the strikes 3-to-2

    Would you please explain the “3-to-2”.

    P.S.: I’ve been away for a while and I’m refreshing my knowledge of Option Trading again.



    • Alan Ellman March 30, 2016 11:14 am #


      This ratio describes the current positions in my personal portfolio: OTM/ITM strikes. For example, if I held 5 positions, 3 are out-of-the-money and two are in-the-money…slightly bullish.

      Welcome back!


  8. Adrian March 30, 2016 4:35 am #

    Alan, thanks for your recent answers given, and even though you answered my 3rd question twice I can now grasp the fact that it is still a good idea to use the MCU in any bearish market.

    Some of my promised questions I need to get clear are about stock technicals here:-
    1. If I am short of stocks to use and I see for one stock that price from previous days close is below the 20dEMA with the confirming stochastics/MACD indicators Mixed(previous day too), then could I use it if the Relative strength(RS) line is Uptrending?(seeing as this indicator measures price performance?), – because you did recently say that I could use whatever indicators I wanted, so I thought that in place of the 20dEMA that I could use the RS line instead – is this alright or should the price be in a short-term uptrend too?

    2. When a stock off the report has an ER before market opens you have said that if ER positive then enter once volatility eases. But is this still a good idea if price from previous days close is below the 20dEMA, and stochastics/MACD indicators are down/negative?(I have always believed that my chart analysis should be taken from the previous days close)?

    3. If at the time you want to put on a trade you notice that the price of the stock has broken out above its s/ways channel resistance then do you still put a trade on, or is it better to wait a day for breakout confirmation?

    4. And when the stock is channelling s/ways then is it necessary for it to also be in a short-term uptrend in order for you to want to buy it? Thanks

    • Alan Ellman April 1, 2016 9:10 pm #


      My responses:

      1- When technical are mixed (in general) it’s okay to use that security but I tend to favor ITM strikes.

      2- If chart technicals are negative, I would pass even after a positive earnings report, until and unless technicals confirm an uptrend with positive momentum.

      3- I would wait another day for confirmation if considering an OTM strike.

      4- No, a stock in consolidation with all other screens bullish is a candidate for covered call writing but usually with an ITM strike unless overall market conditions are strongly bullish.


  9. Alan Ellman March 30, 2016 5:40 pm #

    Premium members:

    This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options as well as the implied volatility of all eligible candidates. For your convenience, here is the link to login to the premium site:

    NOT A PREMIUM MEMBER? Check out this link:

    Alan and the BCI team

  10. Caleb Mock March 31, 2016 7:25 pm #


    Thank you for another great article. Can you help me with a specific application of your methodology?

    I purchased SWHC after it was recommended on the 3/18/16 premium report at 29.42. Last week, news of a potential lawsuit forced the stock price below the 20 day ema (currently 26.62).

    Earlier this week, I bought the option back following the 20% rule. Technicals seem weak, but analysts are still marking SWHC as a “buy.” Should I now try to roll down SWHC or would it be better to leave the stock altogether (converting dead money to cash profits)?

    • Alan Ellman April 2, 2016 11:04 am #


      I cannot give specific financial advice in this venue but I can comment in a general manner:

      1- All companies are subject to lawsuits…it’s the nature of being a company with lots of cash.

      2- The price decline was a combination of the lawsuit and other companies in the industry under-performing.

      3- When negative news comes out after entering a position, those with very low risk tolerance are inclined to move on to another security.

      4- If the news is identified as not being egregious (I love that word!), then we can monitor the position and look to “hit a double” or roll down in the latter part of a contract.

      Congrats on buying back the option at the 20% guideline putting yourself in a position to mitigate losses or perhaps even turn losses into gains.


  11. Adrian April 3, 2016 2:38 am #

    Alan, before I can ask you some questions this week I want to go over 2 statements made from last week.
    – Your answer to my Qu.1 quotes, “When technicals are mixed (in general) it’s okay to use that security”.
    But in the past I got an answer from you about the technicals at Expiration, and looking to rollout, where you told me, “if at expiration with price above the strike price, then if price is below its 20dEMA and/or 100dEMA but other indicators(stochastics and MACD) are positive, then I will allow assignment and use another stock”.
    So for those almost identical technical situations as in my Qu.1 (price below the 20dEMA with the confirming stochastics/MACD indicators Mixed), there looks to be a difference for your answers – but which is the right answer?(use the stock/same stock or don’t buy the stock/allow assignment?)
    For whether the stock was to be potentially bought at the start of the contract or a rollout at expiry instead, then I just don’t see why there should be a difference in actions taken based on those technicals all pretty much the same?

    – Also can you point out the news article that talks about this potential lawsuit for SWHC that Caleb last week briefed you on?(I can’t see that word anywhere but SWHC is a stock I am papertrading)

    If my chart analysis should not be taken from the previous days close, but from the same day – as in intraday- then can you correct me, otherwise I will always take technicals off of the previous days price close.(only need to answer here if wrong.)
    More coming soon. Thanks

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