# TECH TALK

# Implied Volatility and RSI Oscillator for Higher Probability and Bigger Gains!

##### By Roger Scott, MarketGeeks.com

Today, I’m going to teach you how to combine high implied volatility levels with one of my favorite technical indicators, the RSI oscillator.

You’ll get the most premium out of the option that you sell and at the same time, increase your odds of keeping that premium.

Most of you know by now, one of the best times to sell options premium is when the implied volatility for a particular stock or ETF is at a 52 week high.

This ensures that the premium that you are collecting is very high.

Typically, when implied volatility levels get so high, they decrease very rapidly.

This is called a volatility crush and it happens usually right after a major volatility spike happens.

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I’ve done numerous back tests, combining just about every technical indicator, momentum indicator and volatility indicator together to help me gain an edge in the market environment.

**One pattern that consistently worked throughout the last 30 years is combining the 52 week implied volatility with either overbought or oversold market conditions.**

Specifically, I found that 52 week implied volatility spikes, when combined with excessive overbought or oversold price levels, tend to reverse sharply over the next few weeks and sometimes as long as a few months, after the volatility spike occurs.

The reason why I use the RSI oscillator instead of the stochastic or other oscillators, is because the RSI tends to be the least sensitive indicator and gives the least amount of false signals.

The only alteration that I make to the standard settings is adjust the look back period from the standard 14 day setting to 10 days.

This minor adjustment tends to capture the short term price swings a bit better and that’s the setting that I typically use.

As far as the actual indicator, I use the standard 70/30 threshold levels to determine overbought and oversold levels.

So when the asset trending higher and the RSI moves above the 70 level, it usually means that the asset is overbought in the short term.

Alternatively, when the asset is trading lower and the RSI level moves below 30, it lets us know that the asset is oversold and should revert back higher over the near term.

While the RSI alone is fairly reliable, when combined with 52 week volatility spikes, the percentage of accuracy that a short term reversal will occur can be as high as 77%, so it’s not a signal that I take lightly.

In this example, you can see an implied volatility graph of TESLA stock.

The spike that you see is the highest implied volatility spike over the past 52 weeks, that’s the first factor that I pay attention to and that’s where we first begin.

Once we identify the spike in the implied volatility level, we then want to pull up the technical chart of the stock with the RSI oscillator set to 10 days instead of 14 days.

We want to make sure that the RSI level is either extremely overbought or alternatively, deeply oversold.

In this particular scenario, the RSI is well below the minimum 30 threshold level to alert us that the stock is oversold and it may be a good time to initiate bear call spreads.

If the RSI level was above 70 while the implied volatility level was at the 52 week high, then we would consider bear call spreads instead.

While the reaction from the stock is a bit stronger than expected, since the implied volatility spike and the RSI signal, the price of TESLA moved up close to 100 dollars per share, over a 2 month period of time.\

Here’s another example to help you get a better feel for how these two factors influence the price of the underlying asset.

In this example, we have a 52 week implied volatility spike on Expedia stock.

Similarly, while the 10 day RSI already began rising, it’s still below the minimum 30 threshold level, which tells us that the asset remains oversold.

This gives us opportunities to profit from Put Bull Spreads.

If the RSI level was above 70, instead of below 30, then I would instead look at Bear Call Spread instead.

**To summarize**, when assets implied volatility level reaches the highest level over the past 52 weeks and within a few days, the 10 day RSI moves below the 30 level, it means that the underlying asset is oversold.

It also means that price should begin moving higher over the next few weeks or possibly even a few months, if the levels are oversold substantially.

Alternatively, when implied volatility spikes to 52 week highs or 1 year highs and the 10 day RSI moves above the 70 level, it means that the underlying asset is overbought.

It also tells us that price should begin moving back down over the next few weeks or possibly as long as a few months…assuming the underlying asset is sufficiently overbought at the time the implied volatility level spikes.

I hope tutorial gave you a good foundation for combining the 52 week volatility spike with the 10 day RSI oscillator.

This can help you gain a substantial edge in today’s volatility markets.

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