Implied Volatility (IV) is hard to compare across underlyings because one stock's "normal" level of IV may be higher or lower than "normal" IV for other stocks. To compare IV across underlyings, a metric called Implied Volatility Rank (IVR) can be used.
IVR represents the current level of IV as it compares to the historical levels of IV. For example, if a stock's current IV is 20%, and the 52-week IV low was 10% and the 52-week IV high was 25%, the IV rank would be 66%. This is because the current IV is 10 percentage points above the 52-week low, and the 52-week IV range is 15 percentage points.
Using IVR helps gauge which stocks are trading with higher- or lower-than-normal IV relative to themselves. This makes for a much better apples-to-apples comparison when examining the IV levels of different underlyings.
However, there are some drawbacks to looking at IVR by itself. Since the IVR reading is dependent on the IV range of the stock, IVR can be sensitive to small movements in IV when the underlying has experienced a long period of extremely low or high IV. For example, if a stock's IV is caught between 10-15% for an entire year, an IV move to 15 would represent an IV rank of 100%. If a 15% IV is still low for that stock from a historical perspective, then the 100% IVR reading can be slightly misleading.
Another example would be a prolonged period in which the VIX traded between 30-50%. If the VIX dropped to 30 or below, the IVR would be 0%. Based on IVR alone, IV is cheap. In reality, a 30 VIX is still a relatively high reading based on the historical average of approximately 19.
So, it's important to use IV and IVR together, and not in isolation.
Watch this episode of Options Jive with Tom Sosnoff and Tony Battista for their thoughts on this topic.
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