How to Use IV Rank and IV Percentile to Improve Your Trading

As an options trader, you know the importance of Implied Volatility as a way to estimate options prices.

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

We can use AMZN's IV to describe the difference between IV Rank and IV Percentile.

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.

Luckily we can use the IV Perc filter in the Options Scanner to find high IV opportunities to sell high probability and high return Strangles and Iron Condors.

Stocks With the Highest IV Percentile

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