tasty Bite: IV Rank versus IV Percentile
Dec 14, 2017
If you are already involved in the tastytrade community, it's highly likely you already understand and utilize Implied Volatility Rank (IV Rank).
However, it's equally likely that you might not be using Implied Volatility Percentile (IV Percentile).
Today on the blog, we're highlighting the difference between the two, which may help traders more efficiently leverage these metrics going forward.
IV Rank is one of the more popular volatility trading metrics at tastytrade, and is relatively easy to understand. IV Rank tells us whether implied volatility is high or low in a specific underlying relative to the past year of implied volatility data.
For example, imagine that implied volatility has ranged between 30 and 60 for underlying XYZ over the past year. If implied volatility is currently trading at 45, then the IV Rank for XYZ would be 50% - exactly in the middle of its one-year historical range.
If implied volatility was 60 in XYZ, then its IV Rank would be 100%. We often look for opportunities to sell premium when IV Rank is above 50%, and trading conditions match our outlook and risk profile.
Another example of IV Rank, taken from an episode of the tastytrade show Trading With Katie, is highlighted in the graphic below:
Now let's take a look at Implied Volatility Percentile (IV Percentile).
Notably, IV Percentile doesn't specifically take into account the high and low in implied volatility over the past year.
Instead, IV Percentile represents the percentage of days that implied volatility has traded below the current level over the past year. For example, if IV Percentile is 5% in XYZ, that would mean that implied volatility only traded below current levels 5% of the time over the course of the previous 12 months.
On the other hand, if IV Percentile in XYZ is 80%, that would mean that implied volatility had traded below current levels 80% of the time over the previous 12 months.
The slide below, also from Trading with Katie, depicts graphically another example where IV Percentile is 21%. That means that 79% of the time, implied volatility was higher than current levels.
We hope the above information has clearly demonstrated the critical differences that exist between IV Rank and IV Percentile. A more complete understanding of these two metrics should help traders leverage them in a more efficient manner.
If are looking for more information related to this blog post, we recommend reviewing the complete episode of Trading With Katie.
If you have any outstanding questions, don't hesitate to leave us a message in the space below, or reach out directly at email@example.com.
We look forward to hearing from you!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.
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