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Feb 21, 2017

Implied Volatility Rank | What is IV Rank?

By:Brian Mallia

What is Implied Volatility Rank?

Implied volatility rank (or IV rank for short) is a concept that is coming to the forefront of the options trading industry. Many options trader knows what implied volatility is (if not, check out the learn page here) and how it relates to the pricing of options, but few understand what IV rank is.

IV rank is a measure that brings relativity to implied volatility. Implied volatility is a factor in the determination of option pricing and attempts to measure future volatility. IV rank takes that measurement and averages it out so that there is context around the current level of implied volatility.

Why is IV rank important?

Let's break this one down: implied volatility is directly related to the pricing of an option. Options on stocks with high implied volatility have more premium (option buyers pay more for the option and option sellers collect more money when they sell the option) than options on stocks with low implied volatility. Therefore, option sellers like when implied volatility is high because they get a higher premium/credit and option buyers like when implied volatility is lower because they can buy the option on the cheap. This is an important concept to grasp in order to understand why IV rank is a much more useful measure than implied volatility.

Let’s say you want to buy/sell an option in SPY (the S&P 500 index). SPY is an index fund (essentially a portfolio of the S&P 500 stocks), meaning that it typically has lower implied volatility than say, a stock like Facebook. Why is that exactly? Sharp increases or decreases in underlyings within that portfolio have less effect on the overall price because there are plenty of other stocks in the portfolio to keep the price from changing as dramatically.

IV rank is displayed in the orange circle.

So, wouldn’t this mean that option sellers are always getting the raw end of the deal since implied volatility will never really get that high?

That’s where IV rank comes in!

Just because an underlying may not reach a high level of implied volatility, this doesn’t mean that the options will always be priced cheaply. Pricing is relative. What is more important is the level of implied volatility relative to the levels it has been at in the past. 

Over the past 90 days, SPY has had an implied volatility level around 12 to 13%. The highest level was around 16% in the last 90 days. Typically 16% isn’t considered high for most underlyings (so one would expect option prices to be cheap), but relative to where it has been, 16% is actually high and the options prices will reflect that. 

BOOM! And that’s why we put such a focus on IV rank when building the tastyworks platform.

90 day volatility chart from web based tastyworks.

How Is IV Rank Calculated?

The formula for IV rank is simple, really. It is:

100 x (the current IV level - the 52 week IV low) / (the 52 week IV high - 52 week IV low) = IV Rank

Where is IV Rank Found in tastyworks?

IV rank can be found in 2 different places in the tastyworks trading platform. The first is on the trade page displayed in the image above inside of the orange circle. The other place it can be found is on the watchlist page.

On the web version of tastyworks, you can choose to sort underlyings by IV rank too, which is incredibly handy during trade selection.

Now that you understand what IV rank is, you've added another tool to your arsenal - congratulations! Use it to your advantage during trade selection. The power is in your hands.

Still have questions about IV rank? Leave them in the comments and we'll be happy to answer them!

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

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