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Understanding Implied Volatility: IV, IV rank, and IV percentile

Knowing the Implied Volatility of an option contract is not enough to understand its volatility, we also need to check the option’s IV rank and IV percentile.

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.

Examples:

IV RankCurrent IV
0%Bottom of historical IV range
50%Middle of historical IV range
100%Top of historical IV range
IV PercentileOver 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:

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