You want to sell options at high IV, and buy options at low IV to make vega work in your favour.
So you might be interested in the two metrics that show the relative IV positions of an underlying, IV Rank and IV Percentile, and the differences between the two, so you can make educated guesses of the direction of IV as it reverts to the mean.
What Is IV Rank?
IV Rank uses the highest and lowest IV values of the past year to indicate the relative volatility level of the underlying right now.
What Is IV Percentile?
IV Percentile is the percentage of days that the underlying’s Implied Volatility has traded below the current level over the past year.
You might be curious why we use 252 days instead of 365 days in a year. If we remove all the weekends and bank holidays, we have around 252 days in a year that the markets are actually open.
Differences Between IV Rank and IV Percentile
To illustrate the differences between IV Rank and IV Percentile, let’s use AMZN’s current IV statistics as an example.
|52 week IV high||52 week IV low||IV||Number of days with lower IVs in the past year|
So AMZN’s IV Rank is at 41%, meaning it is around half of the range of IV fluctuations in the past year, and it is unknown whether IV will go up or down next.
While AMZN’s IV Percentile is 78%, meaning it is at a high IV state, so there is a high probability that IV will go down as it reverts to the mean.
As you can see IV Rank and IV Percentile can sometimes give completely different results.
This is because while IV Percentile takes into account all trading days in the past year, IV Rank only uses two extreme IV values as input. So IV Rank can be skewed by outlying IV values, distorting our perception of the relative IV.
Therefore when trading options for vega in neutral options strategies like Iron Condor, we prefer to use IV Percentile to help us understand the relative position of Implied Volatility, and reduce the risk of losing Iron Condors.
Use IV Percentile to Find the Best Strangles to Trade
SlashTraders' Options Scanner is designed to find high probability and high return Strangles in seconds. Here are some tips to use the filtering function to find the best short Strangle entry points.
- We want to choose opportunities with longer than 30 DTE to get the safest theta decay.
- We can filter IV Perc >67% to find stocks with IV higher than 2/3 of trading days in the past year. So they have a high chance of contracting IV and vega in our favour.
- Open Interest is the number of the total number of outstanding derivative contracts for the underlying. We can find stocks with Open Interests >100,000 to make sure the liquidity is good, so we get our trades filled easily.
- By choosing Market Cap ($B) larger than 10 billion, we avoid choosing stocks that can get manipulated and explode like GME.
- A good idea is to eliminate stocks with depressed price movement, because IV will expand soon after. So we need to choose Squeeze status as False.
- To further reduce risks, we can limit the Strangle BP to less than $1000, so we can easily diversify our portfolio.
Finally, we can sort the Strangles ROC by descending order to get a shortlist of the highest return Strangles.
You can see the Fair Value and Earnings Date for every underlying to help us fine-tune the selection and get the best entry points.
If the Fair Value is very close to the strikes listed in the Strangle Details, we can be even more confident that the Strangles will be profitable.
Earnings Date is an event that can cause large price movements, so we want to avoid selling neutral options strategy past Earnings Date.
We can see the top 3 stocks with highest return have upcoming Earnings, so selling Strangles for them are quite risky.
Instead, we can look at selling Strangles to SNAP. Even though the Fair Value is outside of the 0.20 delta strikes, we believe it has similar characteristics to a strong social media platform like Facebook, so it may be relatively stable.
If we sell to open a Strangle for SNAP that expires in 40 days, it has a 27% maximum return if SNAP stock price does not exceed the Put and Call strike prices before options expiration.
Now you know how to use the Options Scanner to filter high probability and high return Strangles options. Remember to use the scanner often to find the best neutral trades sell, and profit from the lack of price movement.
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