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 3 examples). Since we are using a 200 day look back period (almost a year), 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% of them. 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 by judging 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.
Why use Implied Volatility percentile?
- The IV percentile allows us to gain insight into the underlying volatility quickly and easily.
- The Percentile is an oscillated indicator and allows you to better identify the high and low points of the option IV.
- The percentile allows us to compare different stocks and thus making it a better indicator to use while market scanning.