The Three Cycles of Volatility

Volatility is a central concept in options trading, influencing how options are priced and traded. To understand volatility effectively, it’s helpful to view it through the lens of three distinct cycles: market, non-event, and event volatility. Each type presents unique opportunities and risks for traders.

Market Volatility

Market volatility is the broadest form and impacts all stocks simultaneously. It’s driven by macroeconomic factors like interest rate changes, inflation, geopolitical tensions, or shifts in overall investor sentiment. During periods of high market volatility, stocks tend to move in the same direction due to increased correlation, amplifying risk and potential reward for traders across the board.

Non-Event Volatility

Non-event volatility reflects the regular day-to-day price movements of a specific stock, independent of larger market influences. This kind of volatility stems from a company’s fundamentals, trading patterns, and industry dynamics. Understanding a stock’s typical non-event behavior allows traders to gauge what constitutes “normal” movement and when something unusual may be happening.

Event Volatility

Event volatility arises from specific, anticipated events—like earnings reports, product launches, or shareholder meetings—that can cause sharp, sudden price movements. Option prices often surge in anticipation of these events due to the uncertainty they create. Traders can exploit this by positioning themselves just before the event to take advantage of rapid IV changes and resulting price swings.

Strategic Use of the Three Volatility Cycles

Understanding the three volatility cycles enables traders to craft precise strategies:

• Use market volatility trends to adjust exposure across sectors or entire portfolios.
• Evaluate non-event volatility to determine baseline expectations for a stock’s behavior.
• Target event volatility for short-term trades that capitalize on pre- and post-event pricing shifts.

Example: Earnings as Event Volatility

Consider a stock like Tesla trading at $100 with earnings scheduled in 10 days. If the market expects significant movement from the event, option premiums may rise sharply due to anticipated event volatility. Traders aware of this can buy options before the announcement and sell shortly after, capturing value from the IV spike.

Conclusion

Mastering the three cycles of volatility—market, non-event, and event—allows traders to better predict price behavior, manage risk, and seize opportunities. Rather than treating all volatility as the same, breaking it down into distinct forms reveals when and why options might be overpriced or underpriced, enabling smarter trading decisions.