Implied Volatility percentile is a ranking method to compare implied volatility to its past values. The ranking is standardized from 0-100, where 0 is the lowest value in recent history, and 100 is the highest value. This value tells us how high or low the current value is compared with the past.
To better explain this, we can use an example:
In the table above, we can see that the implied volatility percentile (we call it rank) is 9.88% for AAOI, 62.85% for AAPL, and 96.05% for ABBV (just three examples). Since we are using a one year look-back period, we can say that the current IV for AAPL is greater than 62.85% of the values over the past year or smaller than 37.15%. Similarly, we can say that the current IV for ABBV is larger than 96.05% of the past IV values over the last year, and for AAOI – the current IV is higher than 9.88% of past values.
This helps us judge quickly and easily if the current IV is high or low for a specific underlying. Here we see that:
- ABBV IV is high,
- AAPL IV is normal,
- and AAOI IV is low.
This will help us decide the option strategy we will choose (and you saw how fast it is).
Why use the Implied Volatility percentile?
- The IV is a standardized measure of how ‘expensive’ or ‘cheap’ the option is. The IV percentile allows us to gain insight into the options relative price quickly and easily.
- .The Percentile is an oscillated indicator and will enable you to identify the option IV high and low points.
- The Percentile allows us to compare different stocks with different volatilities, making it a better indicator for market scanning.
- IV is easier to predict than the underlying movement. The IV percentile helps us identify extreme cases and increase our edge. Read more about it below.
How to scan for the Implied volatility percentile in OptionSamurai?
- We recently conducted backtests to provide more insights into how to trade IV (including 2020 data) – read more here.
- What is the difference between IV rank and IV percentile and which is better?
- Read our Implied volatility research here
- Sign up for OptionSamurai for a free trial.
[Originally published on 25 Jan 2015 and updated since]