In OptionSamurai Scanner we are using IV Percentile to compare the IV of different stocks and call it “IV rank” as we think it is more intuitive to understand. We know that other market players (such as Thinkorswim or tastytrade) use those two terms differently. To avoid confusion this post will explain the difference between the two.
IV Rank and IV Percentile
IV percentile is a measure of implied volatility vs its past values. This is best explained by an example: If IBM IV percentile is 34% – It means that current IV value is higher than 34% of previous values (and of course, lower than 64% of them).
IV Rank is also a measure of implied volatility vs its past values, but it looks only at the highest and lowest values. The formula is:
[IV – Lowest_IV]
[Highest IV – Lowest IV]
If IV values are not too extreme and the look-back period is long enough (about a year) then values will be very similar, but we feel that IV percentile is a better indicator and is more robust (albeit harder to calculate).
This simplified example can will show the difference between the calculations:
Assuming 4 past IV values, we calculated the rank and percentile for a new IV value – 15. When calculating the IV rank, we can see that 15 is exactly the middle between the highest and lowest IV values, and Thus the rank will be 50%. We can also see that 15 is larger than 3 past values out of the four values in our set, so the rank will be 75%.
We feel that the IV percentile is a better indicator and we use it, even if we call it “IV rank” which we feel is the more intuitive way to understand it.
How to scan for IV rank in OptionSamurai: