Implied Volatility Rank
Implied Volatility is one of the most important concepts in trading options. It is a measure of how cheap or expensive an option is. In Option Samurai we use IV Rank (percentile) in order to measure the stock IV. For example: If a stock has IV Rank of 95%. This means that over the last 200 days 95% of the days had lower IV than the current one. Or to put it simply: The current IV is high.
We have tested IV rank on indexes and on major stocks and we can see that this calculation is mean-reverting, meaning – After high IV Rank we can expect a decrease in IV – and vice verse.
Here are results on 5 highly liquid blue chip stocks:
In this tables we can see for example in Microsoft ($MSFT) that after an IV rank of 90 or higher we can expect a 7% decrease over the next 5 days. We can compare it to a rise in IV of 2.1% on average or 13.2% when IV rank is lower than 10%.
If we know that IV rank is mean reverting it helps us plan our trades: for example – if we see high IV rank we want to use strategies that profit from decrease in IV such as selling options. And vise verse: if we see low IV – for example 10 – we can expect a rise in volatility and might consider buying options.
Using IV rank on Option Samurai:
There are 2 main ways you can use IV rank in Option Samurai:
In the Market sentiment widget
In the scan page attached gif:
More research into Implied Volatility (from the blog)