Every module so far has handed you one instrument. A desk does not read them one at a time. It runs the same short sequence on a ticker every morning, in the same order, and the order is what turns the numbers into a decision. This lesson is that sequence. Run it on NVDA now and you can run it on anything tomorrow.
Why this order
Each step answers a narrower question than the one before. The first two decide whether options are cheap or dear, which decides whether you are a buyer or a seller. The next two decide where on the surface to trade: which expiration and which strikes. The last two size the bet and check for the one thing that can overturn all of it. Skip ahead to the structure and you end up picking a trade first and finding reasons for it afterwards.
The morning checklist
- Where does IV sit against its own history? Not "is 40% high" but "is 40% high for this name". The one-year IV percentile answers it: below 30 and options are cheap by this stock's standards, above 70 and they are expensive. This is the first filter, because it decides whether you are more likely to be a buyer or a seller of options today.
- IV against realized. Implied volatility is a forecast; realized is the record. IV 30d above HV 20d means the options are asking more than the stock has been paying out. A wide positive gap favors selling premium. A negative gap says the tape is moving faster than the options admit, and long options are cheap.
- The term structure. Compare the at-the-money IV of the front monthly with the one behind it. Upward, the normal shape, means the market charges more for more time and expects nothing special soon. Inverted, front above back, means something near-term is priced in: an event, a shock, a selloff in progress. The shape tells you which expiration to sell and which to own.
- The skew. The 25-delta put IV minus the 25-delta call IV. Steep skew says protection is dear and upside is cheap; that is when put spreads and collars are priced well and outright puts are not.
- The implied move. The at-the-money straddle divided by the stock price is the move the market is pricing to that expiration. Say it out loud as a percent. If your view of the move is smaller than that number, you sell it; if bigger, you buy it.
- Any event? Days to the next earnings report, and the move the options are pricing for it. An event inside your expiration changes every step above: it lifts IV, kinks the term structure and fattens the straddle. Never sell a straddle without knowing whether the report sits inside it.
Steps three and six in one picture
The term structure and the event check belong together, because an earnings report is the most common reason a curve bends. The report adds one day of large movement, and every expiration after it has to carry that day. A short expiration spreads the jump over few days, so its IV rises a lot; a long one spreads it over many, so its IV barely moves.
At-the-money IV by expiry for a stock with a report 45 days out, pricing a 7% move. Expirations before it sit on the smooth dashed curve; the first one after it jumps. Drag the earnings move to zero and the kink disappears; raise front-month volatility above 40 to see an inverted curve with no event at all.
Read the chart the way you read the chain: expirations before the report sit on the smooth curve, the first expiration after it jumps, and the bump fades as you go further out. If the expiration you were about to sell sits just past the marker, most of its premium is the event.
Steps four and five, as shapes
The skew is the tilt of the smile at one expiration, and the implied move is the width of the range at that expiration. The straddle is worth about 0.8 times the one-standard-deviation move, so a straddle at 8% of the stock says the market's one-standard-deviation range is about 10% either way.
A $100 stock at 38% volatility, 30 days out. The darker band is one standard deviation, about 11% either way; an at-the-money straddle prices roughly 0.8 of that, near 9%. Drag volatility up to see why a high-IV name's straddle costs so much more.
Then the structure
Only now do you pick a trade, and the checklist has already narrowed it.
| Read | Structure that fits |
|---|---|
| IV high for the name, well above realized, no event inside | Sell premium: short strangle, or an iron condor to cap the tails |
| IV low for the name, below realized | Buy premium: long straddle, or a long calendar if the front is cheap against the back |
| Term structure inverted with an event inside | Calendar: sell the inflated front, own the back |
| Steep skew and you own the stock | Collar or put spread rather than an outright put |
| Directional view, implied move larger than yours | Vertical spread: sell the strike you do not need |
A worked read. NVDA's IV percentile prints 22, IV 30d is 38% against HV 20d of 44%, the term structure is upward, the skew is modest, the monthly straddle implies 8%, and earnings are 60 days out, beyond the expiration. Options are cheap for the name, cheaper than the stock's own movement, with no event to fear. That is a buyer's morning: a long straddle or a long calendar, not a short strangle, whatever the stock did yesterday.
The maths: the straddle, the event and the term structure
An at-the-money straddle is worth about 0.8 × S × v × √T, because the average size of a normal move is about 0.8 of a standard deviation. So straddle / S ≈ 0.8 × v × √T. At 38% volatility with 30 days left, √T is 0.287 and the straddle is about 0.8 × 38 × 0.287 ≈ 8.7% of the stock. Turn it round and an 8% straddle means a one-standard-deviation move of about 8 / 0.8 = 10%.
For the event, total variance adds up: v_T² × T = v_base² × T + e², where e is the one-day earnings move. So v_T = √(v_base² + e² / T). With a base of 40% and a 7% earnings move, an expiration 50 days out has T = 0.137 and carries √(0.16 + 0.0049 / 0.137) = √0.196 ≈ 44.3%. An expiration a year out carries √(0.16 + 0.0049) ≈ 40.6%. Same event, four points on the front, half a point on the back.
Your turn
Run the checklist on NVDA in the Terminal, in order. The questions below ask for each step's number as you find it, and the last one asks you to name the structure that fits a read. Then tomorrow, do it on a name you own.
This checklist tells you what to trade. Module 13 will cover the mechanics of trading it: orders and fills, exercise and assignment, margin, position sizing, and managing a trade once it is on.