In the world of options trading, many traders start by trying to predict where the price of a stock is going. They buy puts when they expect a drop, or calls when they anticipate a rally. But those who have spent any time trading around high-impact events like FOMC announcements, earnings, or CPI data quickly discover something frustrating:
The options premium doesn’t behave the way the underlying stock does. The price might move, but the premium stays flat—or worse, declines. Why? Because you’re not just trading price. You’re also trading volatility.
To evolve beyond the beginner phase and thrive in uncertain markets, you need to understand and trade the premium itself, not just the stock price.
What Makes Up an Options Premium?
Before learning how to trade premiums, it’s essential to understand what they are. An option’s price (premium) consists of:
- Intrinsic Value – The actual value if the option were exercised right now
- Extrinsic Value – Everything else: time value and volatility
During major market events, implied volatility (IV)—the market’s estimate of how much a stock might move—can become inflated. This inflates the extrinsic value of options, which makes them more expensive.
Here’s the catch: After the event, IV can drop sharply, crushing the extrinsic value—even if the stock moves in the direction you predicted.
This is where many directional traders get blindsided. You guessed the move right, but the premium didn’t reward you because IV collapsed.
Shifting Focus: Trade the Premium, Not the Price
To overcome this trap, you need to transition from trading based purely on price action to trading volatility and premium behavior. Here’s how:
Trading Premiums When Volatility is Too High: Sell It
When options premiums are bloated due to elevated implied volatility—often seen right before key events—your edge is in selling that overpriced premium.
1. Sell Straddles or Strangles
- Used when you expect the stock to remain within a tight range
- Profits from the decline in volatility and time decay
- High risk, high reward—undefined risk unless you hedge or define it
2. Iron Condors
- A more conservative way to sell volatility
- Limited risk and limited reward
- Ideal when you expect low movement after the event
3. Vertical Credit Spreads
- Directional with a volatility edge
- For example: sell a call spread if you think the market will drop and volatility will fall
These strategies let you profit from IV crush and theta decay, even if the stock goes nowhere.
Trading Premiums When Volatility is Too Low: Buy It
Sometimes the market underestimates the potential for movement. When implied volatility is low relative to historical movement, you can buy cheap premium in anticipation of a big move or a volatility spike.
1. Long Straddles or Strangles
- Betting on a large move in either direction
- Must be early—buying right before the event often means overpaying
- Sensitive to time decay, so timing matters
2. Calendar Spreads
- Buy long-dated options, sell short-dated ones
- Profits from the short-term IV rise and eventual collapse
- Great during pre-event buildup when near-term IV inflates
Reading Volatility Like a Pro
To trade premiums effectively, think like a volatility trader. Here are some essential concepts to guide your edge:
- Implied Volatility Rank (IVR) – How high or low IV is relative to the past year
- Implied Volatility Percentile – How often IV has been lower than it is now
- Skew – The difference in IV between OTM puts and calls (reveals market sentiment and where premiums are overpriced)
- Expected Move – Based on the cost of ATM straddles; tells you how much the market has priced in
When you notice that the expected move is far larger than what you realistically anticipate, that’s a signal: the premium is overpriced—a potential sell opportunity.
Trading Mindset: Think in Volatility Terms
To truly master premium trading, you need to change your mental model.
Instead of asking:
“Will SPY go up or down after the FOMC?”
Ask:
“Will SPY move more or less than what’s priced into the options?”
It’s not about being right on direction—it’s about being right on magnitude versus expectation.
This is how experienced options traders beat the market: by trading the mispricing of volatility, not just price movement.
Recap: Matching Strategy to Market Conditions
| Market Condition | Implied Volatility | Best Strategy Type | Trader Bias |
|---|---|---|---|
| Pre-news event | High | Sell premium (Iron condors, straddles) | Expect IV crush |
| Post-crush | Low | Buy premium (Straddles, calendars) | Expect big move |
| Range-bound | Stable | Credit spreads, condors | Low volatility |
| Trending market | Rising | Debit spreads, long calls/puts | Directional + volatility |
Final Thoughts
Trading options premiums—rather than guessing direction—is how you build consistency in high-volatility markets. Mastering the interplay between price movement and implied volatility separates the disciplined trader from the reactive gambler.
Premiums are a reflection of the market’s expectations. Learn to trade against those expectations intelligently, and you’ll stop being frustrated by “flat” options and start being the one collecting the edge.
IBAFIN 
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