Implied Volatility Rank – The most important element

Implied Volatility Rank

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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:

Backtested results of future IV change after different implied volatility rank values
Backtested results of future IV change after different implied volatility rank values

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:

  1. In the Market sentiment widget

  2. In the scan page attached gif:

 

How to scan for Implied Volatility Rank
How to scan for Implied Volatility Rank

 

Read more:

  1. what is IV percentile

  2. The edge of IV percentile

  3. The difference between IV rank & IV Percentile  

  4. More research into Implied Volatility (from the blog)

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