Implied Volatility or IV is key to understand how volatile is the underlying over the life of the option. More IV generally brings more premium to the table, as profit/risk increases.
This, however, needs to be checked in a defined context, as raw IV can be misleading. That’s why we’ll use as well IV Rank, and IV Percentile:
- The IV rank checks the current IV compared with historical levels (generally 52 weeks) of IV, so you know if that IV is in the low, middle, or high range of the historic share IV
- The IV percentile tells us the % of time where IV was lower than current IV.
|IV Rank||Current IV|
|0%||Bottom of historical IV range|
|50%||Middle of historical IV range|
|100%||Top of historical IV range|
|IV Percentile||Over the past year, stock’s IV has been…|
|10%||Below its current IV 10% of the time|
|50%||Below its current IV 50% of the time|
|75%||Below its current IV 75% of the time|
|99%||Below its current IV 99% of the time|
This can help when we’re deciding if is a good moment to enter on a trade, specially if we’re following volatility mean reversion strategies:
- If IV Rank or IV % is low => Long volatility trades (Buying premium).
- If IV Rank or IV % high => Short volatility trades (Selling premium).
Want to know more? It’s explained in much more detail in this video:
Where can I find this in Thinkorswim ? Under the Option Statistics: