Can you use implied volatility to compare two different options?

This is a great question. You can use implied volatility to compare how much the underlyings expected to move. Obviously, a higher IV implies that the stock is more volatile, and thus, has greater percentage-based moves. Although this will indicate how much the underlyings are projected to move, it doesn’t necessarily compare apples to apples. For instance, one underlying you’re looking at could be trading at 75% IV, while the other is trading at 50% IV. In this instance the 75% IV stock is actually at the bottom of its IV range, and let’s say the average is 125%. While the underlying that is trading at 50% IV seems to be less risky at the moment, it’s actually at the top of its IV range and normally trades around 25. This is where comparing IV Rank comes into play.   If you are a seller of options you want the biggest bang for your buck. At http://tastytrade.com/, we’ve done a ton of studies regarding the performance of selling options when they are at the high range of their normal IV, which would denote a high IV rank. It has been found that selling options when an underlying is at a high IV rank outperforms selling underlyings that might have a higher implied volatility, though it’s currently in the lower end of the range. So, although a underlying might have a slightly higher IV, the market has discounted its likelihood of a major move if it is trading at a low IV rank. This is a very simple video segment that shows the importance of IV Rank or IV Percentile. https://www.tastytrade.com/tt/shows/where-do-i-start-in-3-minutes-or-less/episodes/7934 We do have more complex segments that are backed by the various studies our research team has put together, which you can find here. https://www.tastytrade.com/tt/search?utf8=%C3%A2%C2%9C%C2%93&search=iv+rank   Also, for your reference, tastytrade has a brand new trading platform called dough, which puts an emphasis on IV Rank. These ranks are displayed prominently when viewing watchlists and on dough’s trade page. Check it out at http://dough.com/.

Options are a risk market. You exchange risk for a certain amount of premium, and that risk/premium equation helps to define the implied volatility of an option. This IV can also be considered the "perception of risk," which is mostly derived through time and volatility. So if you are looking at two options and one has a higher IV than the other, does it make it more risky? It depends. You should also be asking "relative to what?" Another measure you should incorporate when analyzing potential risk is the historical volatility of the underlying instrument-- if the current implied volatility is much higher than the historical volatility, then premiums may actually be a sell rather than a buy. Another thing to consider is how OTM these options are. Often you will see an IV "skew," as implieds are not constant across all strike prices and months. So you may want to look at a normalized IV on a 30 day basis. One more thing, if you're looking at odds and risk, is just to look at the delta of the options. Delta essentially is the odds that the option will expire in-the-money. So an ATM option will have about a .50 delta as there is a 50% chance of "expiration." So that should help you define your overall odds.

IV is certainly one factor of comparison, but I think you need to be careful as you use it to comparison shop across different stocks & (widely differing) expirations.  I mostly use it for two things:  * to monitor an option I own over time  * to sanity-check that the price of a particular option I'm considering buying/selling in the next few minutes isn't widely out of whack w/ adjacent strikes (since options markets, particularly for deep OTM options, are far less liquid than the underlying stocks) One thing in particular to watch out for if you hadn't considered it: IV for a company's options will spike just before earnings (and generally "return to the mean" thereafter), so if you're comparing two companies and only one of them is just before/after earnings announcement, their IVs (even with all other factors being equal) could be pretty significantly out of step.

As you know, option prices are sensitive to a number of different parameters, including vol. Depending on the nature of your option, the relative risks (gamma, vol, IR) change. You need to have an idea of what you mean by 'risk' to be able to answer this.

I enjoyed reading all of these answers.  I found 's answer to be particularly apt.  You would do well to define (for your number crunching as well as possible trading) what you mean by "risk."  I'll go one further in this seemingly semantic direction and say that you'd also benefit by defining "best" as in "single-best."   Time, rates, underlying price, implied vol -- all the inputs to your model -- if you hold all but one of them as known, you can solve for the unknown, and price your "risk" accordingly.  But that's a lot of variables to hold constant.  Variables want to move like markets want to fluctuate.  It's confusing. So my contribution -- apart from echoing and clarifying -- will be to share my own personal perspective about what options are.  How I think of them.  I think of them like partial futures (or partial 100-lots of stock).  How partial?  Depends on where all the variables in your Black Scholes model stand.  I particularly like this approach because it speaks the language of leverage, and that's what options give you, or give up, depending on whether you're buying or selling. Another useful perspective?  In a tweet, options are how your underlying interfaces with time. Redefine your question, your perspective.  It will help.  It defies simplification because there are so many inputs.  A multi-variable equation such as those used in options pricing makes a mockery of questions like "best" and goads us to redefine towards something like "best... for WHAT?"