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High IV or low IV: which stocks should option sellers pick?

High implied volatility means bigger premiums because the market expects bigger moves. That premium is pay for risk, not a gift. One sharp drop can wipe out months of it, so pick the stock first and let the premium be whatever it is.

Options guide · 9-minute read · Updated 2026-10-26

The short answer

Implied volatility (IV) is the size of move the options market expects from a stock. High IV makes options cost more, so sellers collect more. Low IV makes them cheaper, so sellers collect less.

High IV pays more because the stock is more likely to make a big move, including a big drop through your strike. The extra premium is what the market pays you to carry that risk. It is not an edge on its own.

For the wheel strategy, the honest order is: pick a stock you'd own, then accept the premium it pays. Not the other way round.

What IV is really telling you

Think of an option's price as an insurance premium. A house next to a river costs more to insure than one on a hill. The insurer isn't being generous on the river house. They are charging for the flood.

When you sell a put, you are the insurer. High IV is the river.

The page on implied volatility explained covers where the number comes from.

A worked example where the big premium loses (an illustration, not a trade idea)

Two made-up stocks both trade at $50. You have $4,500 set aside for one put.

• LowCo is a steady business. Its 30-day $45 put pays $0.40 ($40).
• HighCo is a popular story stock with very high IV. Its 30-day $45 put pays $2.50 ($250).

HighCo looks six times better. You pick HighCo and sell the $45 put every month.

Months 1 to 3: HighCo swings around but closes above $45 each expiry. You keep $250 three times: +$750.

Month 4: bad news lands. HighCo gaps from $48 to $20 overnight. You are assigned 100 shares at $45.

Four months of the "great" premium came to $1,000. One gap took $2,500. You are now down −$1,500, holding a stock worth $20 that you agreed to buy at $45.

Now the covered-call half of the wheel. To avoid locking in the loss, you'd sell calls at $45 or higher. With the stock at $20, a $45 call is worth almost nothing. The wheel stalls.

The same four months on the low-IV stock

LowCo's put pays $40 each time. It's not immune to falling, so here are two honest versions:

Low IV didn't make LowCo risk-proof. It lost money in two of three rows. But the drops were smaller, and they were the kind of drop the market had priced in.

The meme-stock trap

The most extreme high-IV stocks are the ones a crowd is chasing. The premium on their puts can look unreal. It's real; the moves are too.

These stocks often share a pattern:

• A huge rise in a short time, driven by attention more than sales.
• Volume that can vanish when the crowd moves on.
• Very large moves in a single day, both ways.
• Trading halts that freeze you in place.

When the attention fades, the stock can fall far below any strike that looked comfortable. Then IV falls too, so the covered calls you hoped to sell pay very little. We walk through one in I sold puts on a meme stock.

How to use IV without getting used by it

IV is useful. You just read it as a warning light first, a price second.

1. Pick the stock first. Would you own 100 shares at the strike for a year? If not, IV doesn't matter.
2. Ask why IV is high. Earnings inside the expiry? A recent crash? A news event like a court ruling or drug approval? A crowd? Each one is a reason the stock could move hard.
3. Compare IV with its own past. A stock that is always high IV is different from a calm stock that just spiked. IV percentile and IV rank show where today sits in its own range. See IV rank for picking stocks.
4. Size for the gap, not the premium. If a drop to half the price would hurt too much, the position is too big, however good the premium looks.

A quality stock at a moment of higher-than-usual IV, with no earnings inside the trade, is a very different trade from a story stock that is always on fire.

In Canada, the same rules apply in a TFSA or RRSP: covered calls are widely allowed, cash-secured puts depend on the broker, and options permissions differ by broker.

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