Measuring implied volatility (IV) with a few metrics enables traders to put context around current and historic IV levels. At tastytrade, we focus on two measurements - IV Rank & IV Percentile.
IV Rank is a measurement from 0 to 100 that analyzes the high IV point & the low IV point over a certain time frame, and weighs current IV levels against those points. We usually look at a time frame of one year. For example, if an underlying had an IV low of 50% and an IV high of 150%, an IV rank of 50 would mean IV was currently at 100%. If that same underlying had an IV of 50% or lower, it would have an IV Rank of 0. If it had an IV of 150% or higher, it would have an IV Rank of 100. One of the concerns with IV Rank is that it doesn’t take outlier IV spikes or lulls into account. If an earnings announcement spikes IV to 200% just for one day, the new measurement for IV Rank would be from 50% to 200% for that same underlying. IV Percentile looks to smooth out this flaw and provide a more accurate reading.
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