Category: Options

What is IV Percentile and how to use it?

Although the IV Rank is a very useful tool to determine whether the implied volatility of a stock or commodity is high or low, it has a weak spot. This weak spot occurs for example always when the implied volatility spikes and generates outliers. This happens, for instance, during a crash. In this case you would get wrong conclusions considering only the IV Rank. The other weak spot of the IV Rank is that with this tool you can also get false conclusions although there are no outliers. One prominent example for this situation is the value of the VIX, the Implied Volatility Index. To make it better understandable, let’s first take a look at some examples. After this, I will continue with the answer for the question: “What is IV Percentile and how to use it?”.

What is IV Rank and how to use it?

One of the most important data for an options trader is the implied volatility. The higher the implied volatility the higher would be the price of an option. But using the implied volatility as a naked figure has a weak spot. When you take a random stock and take a look at its implied volatility, would you be able to determine whether it’s high or low, especially compared with the volatility of the past? Actually, you wouldn’t. Maybe you would be indeed able to do this when you observe a stock for a longer period of time. But this would apply just to one stock and not to every stock or commodity. And here comes a solution which is called the Implied Volatility Rank or just the IV Rank.