What Is Implied Volatility (IV) Rank and How to Use It in Options Trading?

Implied volatility rank (aka IV rank or IVR) is a statistic/measurement used when trading options, and reports how the current level of implied volatility in a given underlying compares to the last 52 weeks of historical data. IVR is on a scale between 0-100, where 0 represents the low IV% print for the year, and 100 represents the high IV% print.

Option traders typically use implied volatility rank to assess whether implied volatility (IV) is high or low in a specific underlying based on the past year of implied volatility data. High levels of implied volatility may signal that an opportunity exists to sell options/volatility, while extremely low levels of implied volatility may signal that an opportunity exists to buy options/volatility.

For example, if implied volatility ranged between 30% and 60% during the last 52 weeks in hypothetical stock XYZ, and implied volatility is currently trading at 45%, XYZ would have an implied volatility rank of 50.

If implied volatility were currently trading 60% in XYZ stock, then the associated implied volatility rank would be 100—indicating that implied volatility in XYZ was trading at the highest levels observed in the last 52 weeks. If implied volatility goes above 60%, then the current IV would be setting the new upper bound for IV rank going forward.

Implied volatility is the projected annual price movement of an underlying stock, presented on a one standard deviation (SD) basis. This figure is derived from the options prices - in other words, we use the Black-Scholes model’s inputs to solve for IV, not the other way around.

If XYZ stock is trading at $100 per share and has an implied volatility of 20%, that means the projected price movement for the stock is between $80-120 over the course of the year. Remember, this is presented on a one standard deviation basis, which accounts for 68.2% of occurrences.

IV is not perfect for that reason, but it does allow us to use options prices to determine how much future stock price volatility we may expect. The higher the IV number, the more projected movement we should expect as options prices are more expensive than a low IV environment.

More on Implied Volatility

Implied volatility percentile (aka IV percentile or IVP) is another important metric that market participants can use to analyze the relative extrinsic value of an option. Similar to implied volatility rank, implied volatility percentile provides insight into the current level of implied volatility as compared to the last 52 weeks of data.

However, in the case of implied volatility percentile, the metric reports the percentage of days over the last 52 weeks that implied volatility traded below the current level of implied volatility.

For example, if implied volatility percentile is 5% in hypothetical underlying XYZ, that would indicate that implied volatility only traded below current levels 5% of the time over the course of the previous 52 weeks. That reading would suggest that implied volatility is currently closer to the lower end of its historical range, because 95% of the time implied volatility is higher than it is now.

On the other hand, if IV percentile in XYZ is 90%, that would indicate that implied volatility had traded below current levels 90% of the time over the previous 52 weeks. That level would therefore indicate that implied volatility was trading at the higher end of its historical range.

Much like IV rank, market participants can use IV percentile to assess how current levels of implied volatility compare to the previous 52 weeks of historical data.

IV percentile is a very simple calculation, but you need the IV% data for every trading day to determine how the current IV% weighs against the previous 252 trading days of the year.

Once you have these values, you simply divide the number of days previous IV% was below the current IV% by 252 trading days.

While other considerations may be taken into account, an implied volatility rank above 50% can be indicative of an attractive opportunity to sell options/volatility, while an implied volatility rank well below 50% can be indicative of an attractive opportunity to buy options/volatility—both due to the mean reverting nature of implied volatility.

Profit in mean reversion trades is by no means guaranteed, because future volatility is unknown. However, it has been observed that implied volatility is mean reverting on average, over time.

Much like IV rank, market participants can use IV percentile to assess how current levels of implied volatility compare to the previous 52 weeks of historical data.

For example, if implied volatility percentile is 5% in hypothetical underlying XYZ, that would indicate that implied volatility only traded below current levels 5% of the time over the course of the previous 52 weeks.

That reading would suggest that implied volatility is currently closer to the lower end of its historical range, because 95% of the time implied volatility was higher than it is now. When implied volatility percentile is between 0-30% that may be an indicator that options/volatility are “cheap,” and attractive to buy.

The reverse is true for elevated implied volatility percentiles at 70% or above, because an elevated IV percentile indicates that implied volatility is at the higher end of its historical range.

For example, if implied volatility percentile is 90%, that means implied volatility traded below current levels 90% of total trading days over the course of the previous 52 weeks, and that implied volatility was higher than the current level only 10% of the total trading days over the last 52 weeks.

At the end of the day, IVR and IVP are contextual metrics to determine if extrinsic value in options prices are high or low, and traders use that information to determine strategy selection, desired risk, etc.