IV Rank (Implied Volatility Rank) is a handy tool used by traders and investors in the world of finance to evaluate the current level of implied volatility for a particular asset, like a stock or an index, in comparison to its historical volatility range. It provides a clearer understanding of how expensive or cheap options might be at the moment.
Here's how IV Rank works in simple terms:
Imagine you have a stock, ABC, and you're interested in its options. The implied volatility (IV) of an option is a measure of the market's expectations regarding the stock's future price movement. It represents the market's perception of potential price swings. A higher IV indicates a greater anticipated price change, and vice versa.
IV Rank takes this concept further by comparing the current IV of the stock to its IV levels over the past 252 trading days (approximately one year). By doing so, it considers both high and low IV levels that the stock experienced within that time frame.
The formula for IV Rank is straightforward. It calculates the percentage of the current
IV in relation to the stock's IV range over the previous year. For example, an IV Rank
of 50 means that the current IV is correct in the middle of its high and low points over
the past year. An IV Rank of 100 indicates that the current IV is at its highest level
over the year, signalling a potentially expensive time to buy options. Conversely, an IV
Rank of 0% suggests that the current IV is at its lowest, which could mean cheaper options.
This metric helps traders determine whether the current IV is relatively high or low compared to the recent past. When the IV Rank is high, it may be a suitable time to sell options as premiums are inflated, while a low IV Rank might be an opportune time to buy options at lower costs.
In essence, IV Rank simplifies the evaluation of option pricing and provides traders with valuable insights for making more informed decisions based on historical volatility behaviour. Remember, a lower IV Rank does not guarantee profitable trades, but it does offer a valuable reference point to consider when engaging in options trading.
IV Rank compares the present IV to both high and low volatility levels over the past 252 trading days.
IV Rank compares a stock’s current IV to its Range over a certain period of time. Based on the IVR of the previous year, the IVR will tell you whether Current IV is high or low.
IV Rank varies from a range of 0-100
The IV Rank is calculated by taking the highest and lowest volatility figure over the past 365 days and comparing it to the current implied volatility.
IV Ranks close to 100 meaning that the stock is at near the highest implied volatility over the past year and IV Ranks near 0 telling investors that the implied volatility of the stock is near the lowest point over the past 365 days.
As a general rule of thumb, IV Ranks above 50 are considered expensive, and below 50 are considered cheap.
For example, Let's take a live example from the above image.
NavinFlorine Stock has a LIVE IV of 68.71
The current IV Rank is 167.01
In this scenario, traders can deploy Short Straddles in NavinFlorine Stock. For instance, if a stock has an IV Rank of 90%, a trader may look to implement strategies that profit from a decrease in the stock's implied volatility (Traders can deploy Short Straddles) in this scenario, because a 90% IV Rank means that the stock's current IV is at the peak of its one-year IV range.
On the other hand, if a stock’s IV Rank is 0%, then traders might look to deploy strategies that profit from an increase in implied volatility, (Traders can deploy Calender spreads) as the IV Rank of 0% indicates the stock’s current implied volatility is at the bottom of its range over the past year.
Implied Volatility Percentile (IV Percentile) is a helpful tool in finance that shows the percentage of days in the past when a stock's implied volatility (IV) was lower than its current level. It gives traders an idea of how expensive or cheap options are compared to historical volatility.
To calculate the one-year IV percentile, we count the number of trading days
when the IV was below the current IV and divide it by 252 (the total number of trading days in a year).
For example, if a stock's current IV is 35%, and during 180 out of the past 252 days, the IV was below 35%, the IV percentile would be:
IV Percentile = 180 / 252 ≈ 0.7142 or 71.42%
This means that the stock's IV has been below 35% about 71% of the time over the past year.
When the IV percentile is high, it indicates that option prices are higher than usual, creating an opportunity to sell options with elevated premiums using strategies like strangles, straddles, credit spreads, and iron condors.
On the other hand, when the IV percentile is low, it suggests that option prices are relatively lower. During such periods of lower implied volatility, traders often prefer to buy options, anticipating potential price movements.
In summary, IV Percentile helps traders gauge whether options are expensive or cheap compared to historical levels.
A high IV Percentile suggests selling options, while a low IV Percentile suggests buying options. It's a valuable tool for making more informed decisions and managing risk in options trading.
On the Talkoptions website, traders can access valuable information about F&O (Futures and Options)
stocks, including High IV Rank and High IV Percentile.
These metrics help traders understand the current level of implied volatility compared to historical levels.
Traders can quickly see the Top Gainers and Top Losers among the F&O stocks by selecting the respective buttons. This provides insights into the most significant price movements in the market.
Additionally, traders can analyze High IV and High IV Percentile data for different timeframes such as 1-month, 3-months, 6-months, and 1-year. This helps them gauge volatility trends over varying periods.
When IV Percentile precedes significant events like earnings announcements or economic reports, it may signal potential trading opportunities. For instance, during high IV periods, traders can consider deploying the Short Straddle strategy to benefit from anticipated stable prices.