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In a recent article titled What is Quantifying Risk: Part I- Using Delta, one methodology of measuring the risk of our covered call writing and cash-secured put trades was analyzed. In this article, implied volatility (IV) will be investigated as another metric for estimating the risk in our trades.

What is implied volatility?

This is a forecast of the underlying stock’s (or ETF’s) price movement, up or down, as implied by the option’s price in the marketplace. IV stats are published on an annual basis (expected price movement over the next 1 year) and is based on 1 standard deviation (expected to fall into that range 68% of the time).

To make IV stats meaningful for a particular option contract, a conversion formula must be used. BCI’s Expected Price Movement Calculator has that formula inherent in the spreadsheet. By entering the at-the-money (ATM) IV, we can establish an approximate expected trading for any option contract. Strike prices can be selected based on this range depending on the strategy used.

Since the results are anticipated to fall outside this range 32% of the time (based on the 68% standard deviation), we can forecast a risk factor of 16% on either end of that range. Therefore, when using IV, we will assess our risk at approximately 16%.

Covered call risk example

We may not want our shares sold. We would then select an out-of-the-money strike based on the amount of risk we are willing to incur. This will vary from investor-to-investor. We also want to be sure that the premium returns align with our pre-stated initial time-value return goal range. Since mitigating risk comes at a cost, we would anticipate lower returns than traditional option selling.

Cash-secured put risk example

We may not want to purchase the underlying shares. We would then select an out-of-the-money strike based on the amount of risk we are willing to incur. This will also vary from investor-to-investor. We also want to be sure that the premium returns align with our pre-stated initial time-value return goal range. Since mitigating risk comes at a cost, we would anticipate lower returns than traditional option selling.

Real-life example with Alphabet, Inc. (Nasdaq: GOOG): Call Option-Chain on 5/1/2025

• With GOOG trading at $162.36, we look for the IVs of ATM (near-the-money, in this case) strikes
• The $160.00 and $165.00 strikes have IVs of 31% and 30%
• We’ll user 31% in the Expected Price Movement Calculator

BCI Expected Price Movement Calculator: GOOG calculations

• After entering the ATM IV (31%), the spreadsheet projects a trading range of $147.93 to $176.79 during the 30-days of this contract
• Each end of this range represents a risk factor of 16% (16% on either side of 1 standard deviation)
• If we were selling an OTM cash-secured put that we didn’t want exercised, we’d select a strike near $147.93
• If we were selling an OTM covered call that we didn’t want exercised, we’d select a strike near $176.79
• These represent risk of exercise factors of approximately 16%. If less risk is preferred, we would use deeper OTM strikes
• The next step is to run the calculations using our Trade Management Calculator (TMC) to make sure the initial time value return goal range is satisfied

Discussion

The approximate amount of risk we are subject to in our option-selling trades can be quantified using implied volatility. The greater the risk that aligns with our personal risk tolerance, the higher will be our initial time-value returns and vice-versa. Despite taking defensive postures to our trades, the returns can still be significant.

EXPECTED PRICE MOVEMENT CALCULATOR

The Expected Price Movement Calculator is designed to generate an approximate projected trading range for the underlying security, specific for selected contract expiration date. The at-the-money implied volatility (IV) of the stock or ETF (exchange-traded fund) is used to achieve this valuable information.

Inherent in the spreadsheet is a conversion formula that recalibrates the annualized IV stat into one specific for the contract being traded. Easily accessed option-chain data is entered into the white cells at the top of the spreadsheet and calculations will appear in the yellow cells below.

Click here for a video & more information.

Your generous testimonials

Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to publish several of these testimonials in our blog articles. We will never use a last name unless given permission:

Upcoming events

1.Mad Hedge Investor Summit

Tuesday September 9, 2025

11 AM ET

Register here for free.

2. BCI Educational Series Webinar # 8: New Credit Spread Calculator

Thursday September 18,2025

8 PM ET – 9:30 PM ET

Over the past 2 years, BCI has been developing and beta-testing a 1-of-a-kind spreadsheet for entering and adjusting our credit spread trades. Like our Trade Management Calculator (TMC), our goal was to make it the industry standard. Only you can decide if we accomplished our mission.

Alan & Barry will introduce this product, review all the tabs inherent in the spreadsheet and demonstrate how to use it. A 1-time early order discount will also be offered.

For those who trade, or are interested in learning how to trade, credit spreads, this is a must-see webinar.

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3. Orlando Money Show

Orlando Resort @ ChampionsGate

October 16 – 18, 2025

• Opening ceremony keynote address
• 45-minute workshop class: Traditional & Low-Risk Covered Call & Cash-Secured Put Trades

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4. Money Masters Symposium Sarasota Florida

December 1 – 3,2025

Setting Up Option Portfolios Using Stock Selection, Diversification, Cash Allocation and Calculations

Analysis of 6 covered call writing trades

Minimize risk and maximize returns. These are our 2 main goals when crafting our option portfolios. There are several factors we can utilize which will put ourselves in an outstanding position to achieve these objectives. Here is a summary of those factors which will be addressed during this presentation:

• Select elite-performing stocks and ETFs
• Diversity stock positions as well as their industries
• Allocate a similar amount of cash per-position
• Ensure that initial calculations align with strategy goals and personal risk-tolerance
• Once trades are entered, go into position management mode- be prepared for exit strategy opportunities

Registration link to follow.