What is Implied Volatility vs. Implied Volatility Rank?
What is Implied Volatility vs. Implied Volatility Rank?
Understanding what kind of movement and fluctuations the market anticipates can be valuable while analyzing trades
- As premium sellers, understanding where volatility levels are in the market is a crucial element to being successful.
- Implied volatility is the volatility metric fed directly into the option pricing models to determine option prices.
- Implied volatility rank gives you a sense of where that specific stock’s volatility is, relative to where it has been over the previous year.
In the world of short premium market volatility one of the most important variables to track.
Understanding what kind of movement and fluctuations the market anticipates can be valuable during the trade-analysis phase. In the world of volatility, however, there are at least two different metrics you want to be aware of: implied volatility and implied volatility rank
Implied volatility
Implied volatility is a mathematical measurement of the future volatility that the market expects for a specific period. Different periods will almost certainly have various levels of volatility. A trade scheduled over a 30-day period will likely have a different volatility than a trade over a 45-day period. And that will have a different volatility than a trade over a 10-day period, and so on. Implied volatility is clearly important from a market movement standpoint.
In addition, implied volatility also plays a direct role in determining option prices themselves. In an option pricing model, such as the Black-Scholes Model, a handful of market metrics are taken from the real-time markets, plugged into the model, and output what the option price should be based on those data. One variable inserted into the model—arguably the most important one—is implied volatility. As the implied volatility of a stock rises, its option prices will rise, and as the implied volatility of a stock falls, its option prices will fall. So, the first piece to putting together the market volatility puzzle is recognizing this role that implied volatility plays.
Implied volatility rank
An altogether different—but equally valuable to us at tastylive—measure of volatility is implied volatility rank. While implied volatility measures the future movement of the stock and gets input directly into the option pricing model, implied volatility rank looks at implied volatility itself to gauge whether it is relatively high or relatively low.
By comparing the current implied volatility to its range over the previous twelve months, implied volatility rank gives you a ranking of the implied volatility the same way that a standardized test score gives you a ranking of your performance
If the IVR on a stock is 70, then its current implied volatility is higher than 70% of all implied volatilities over the last year, so relatively high and a good short premium candidate. If the IVR on a stock is 25, then its current implied volatility is higher than 25% of all implied volatilities over the last year. That means volatility is relatively low, making the stock a less-than-optimal short premium candidate.
Jim Schultz, a quantitative expert and finance Ph.D., has been trading the markets for nearly two decades. He hosts From Theory to Practice, Monday-Friday on tastylive, where he explains theoretical trading concepts and provides a practical application of those concepts to a trading portfolio. @jschultzf3
For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.
Trade with a better broker, open a tastytrade account today. tastylive, Inc. and tastytrade, Inc. are separate but affiliated companies.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.