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IV Rank vs IV Percentile: Which Should You Use?

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by Gavin in Blog
September 19, 2020 3 comments

Implied volatility is a very important concept for option traders to understand and is something that always generates a lot of questions among beginners.

When deciding which option strategy to trade, a big part of that decision is based on our opinion of implied volatility. Is implied volatility currently high or low?

This is where IV Rank and IV Percentile come in.

Contents

Implied Volatility Rank (IV Rank) Explained

IV Rank compares a stock’s current level of implied volatility and compares it with the range of implied volatility over a certain time period, usually one year.

You can read about it in detail here, but let’s have a quick refresher.

IV Rank is calculated as follows:

Let’s look at an example using Salesforce stock (CRM)

Date: August 31st, 2020

Current IV: 43.80%

12-month Low IV: 18.14%

12-month High IV: 104.58%

This give us the following calculation:

The resulting value is 29.69 and that is the IV Rank as of that date. Pretty easy, right?

This figure of 29.69 that the current level of implied volatility is closer to the low end of the range that has been seen in the last 12 months.

If the IV rank was zero, that would indicate that the current implied volatility was at the very bottom of the 12-month range and an IV rank of 100 would indicate that it was at the very top of the 12-month range.

Let’s no take a look at the implied volatility percentile.

Implied Volatility Percentile (IV Percentile) Explained

IV percentile indicates the percentage of days with implied volatility closing below the current implied volatility over the period.

Here’s how it is calculated:

We use 252 as the denominator because that is roughly how many trading days there are in a year once you take out weekends and bank holidays.

Let’s look at our Salesforce example again:

Date: August 31st, 2020

Current IV: 43.80%

Trading Days Below Current IV: 214

Which gives us:

Which equals an IV percentile of 85 or 85%. We therefore know that CRM’s implied volatility has been lower than the current level on 85% of trading days in the past year.

Now you understand the difference between the two and how they are calculated, but thankfully you don’t have to make these calculations yourself.

Most brokers will provide this information. Here is the data from Interactive Brokers. You just need to add the headers for 52IVR and 52IVP.

Differences Between IV Rank or IV Percentile?

In this CRM example, we’re seeing quite a big variance in values of IV rank vs IV percentile. This is because of the massive spike in volatility in March 2020 which is distorting the numbers.

You can see on the chart below (yellow line), that the current level of IV is higher than most days in the last 52 weeks (85% IV Percentile).

BUT… because of the vol spike in March the current value of IV of 45% is a long way below the high of near 95%.

You therefore get a situation where the IV Percentile is high, but the IV Rank is low.

Should You Use IV Rank or IV Percentile?

Most trader should realize that you want to sell volatility when it is high via strategies like iron condors and short straddles and buy volatility when it is low via strategies like long straddles and long strangles.

So, which one should we use?

Our CRM example indicated that IV rank is low but IV percentile is high.

Personally, I think that IV rank is slightly flawed because the data gets skewed whenever there is a large spike in volatility.

We see this in our CRM example, when implied volatility is at 43.80% which is higher than the majority of the values seen in the preceding 12 months.

To me IV percentile is the more reliable indicator.

What do you think? Let me know if the comments.

Trade safe!
Gav.

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

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3 Comments
  1. Yusef says:

    This question seems to come up a lot as there are many sellers of premium among option traders. I like your analysis that presents IV percentile as a better representation of IV of relative to the IV history due to skew caused by spikes. L(y) = (n+1)(y/100); [L(y)/(n+1)]*100=y L(y) is position of observation, n is number of observations in ascending order, y is percentile. I really enjoy your blog post thanks for posting

  2. Felix says:

    Hi Gavin,

    1) I think IVP gives more value for looking for high IV vs low IV since it is not as skewed by the spike in IV for a short duration of the year. IVP takes into account all 252 trading days

    2) Additionally, I would look at 13 and 26 day period for IVP and IVR in Interactive Brokers. Other scanners probably provide additional and better metrics like IV change velocity over x days versus a period of time.

    1. Gavin says:

      1) Exactly agree. I mentioned the same in the article.

      2) Yep fair point.

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