While IV Rank tells you where volatility falls in its range, IV Percentile tells you something different and often more useful: what percentage of the time volatility was lower than it is today. This distinction matters for making accurate trading decisions.
What is IV Percentile?
IV Percentile (IVP) measures the percentage of days over the past year when implied volatility was lower than it is today. It answers the question: "How often was IV lower than this?"
Simple definition: If IV Percentile is 75%, that means current IV is higher than it was on 75% of the trading days over the past year. Only 25% of days had higher IV.
How is IV Percentile Calculated?
The calculation is simple but requires historical data:
IV Percentile Formula
IV Percentile = (Number of days with IV below current IV / Total trading days) x 100
Example: Over the past 252 trading days, 200 days had IV below today's level.
IV Percentile = (200 / 252) x 100 = 79.4%
IV Percentile vs IV Rank: Key Differences
These two metrics often give different readings. Understanding why helps you choose which to use:
IV Rank
- Uses only two data points: yearly high and low
- Measures where IV falls in the range
- Can be distorted by extreme one-time spikes
- Simple to calculate
IV Percentile
- Uses every day's IV reading over the year
- Measures frequency, not range position
- Less affected by one-time spikes
- More representative of typical volatility
When They Differ Dramatically
Stock XYZ had a flash crash 6 months ago when IV spiked to 120%.
Normally, IV ranges from 20-35%. Today IV is 30%.
IV Rank: (30-20) / (120-20) x 100 = 10% (looks very low)
IV Percentile: IV of 30% is higher than 70% of the past year's readings = 70% (looks elevated)
IV Percentile gives a more accurate picture because it is not skewed by the one-time spike.
Interpreting IV Percentile
IV Percentile readings from 0 to 100 tell you how current volatility compares to history:
- 0-20%: Very low volatility, rarely this low historically
- 20-40%: Below average volatility
- 40-60%: Average volatility
- 60-80%: Above average volatility
- 80-100%: Very high volatility, rarely this high historically
Why IV Percentile is Often Better
Many professional traders prefer IV Percentile for several reasons:
1. Not Distorted by Outliers
A single extreme event (crash, earnings disaster, market panic) can set an artificially high ceiling for IV Rank, making all future readings appear low. IV Percentile weighs every day equally.
2. More Consistent Over Time
As the extreme spike rolls off the 52-week window, IV Rank can jump dramatically even if current volatility has not changed. IV Percentile changes more gradually.
3. Better for Strategy Selection
Knowing that volatility is higher than 80% of historical readings is more actionable than knowing it is at 30% of the range between high and low.
Using IV Percentile in Trading
Premium Selling (High IV Percentile)
When IV Percentile is above 50-60%, options are expensive relative to history:
- Sell iron condors for elevated premium
- Sell credit spreads for better risk/reward
- Write covered calls for higher income
- Sell cash-secured puts with better premiums
Premium Buying (Low IV Percentile)
When IV Percentile is below 30-40%, options are cheap:
- Buy calls or puts for directional plays
- Buy straddles/strangles if expecting a move
- Use debit spreads for defined-risk trades
- Consider LEAPS for long-term positions
Combining IV Percentile with Other Factors
Upcoming Events
High IV Percentile before earnings is expected and normal. The question is whether it is higher or lower than typical pre-earnings volatility for that stock.
Market Regime
During market-wide fear (VIX elevated), many stocks will have high IV Percentile. This is a broad market effect, not stock-specific.
Sector Trends
Sometimes entire sectors see elevated volatility due to regulatory changes, commodity prices, or macro factors.
Best Practice: Use IV Percentile as a first filter. If it is extreme (above 80% or below 20%), investigate why. Is it stock-specific, sector-wide, or market-wide?
Practical Trading Examples
Example 1: High IV Percentile Trade
Stock ABC has IV Percentile of 85%. No earnings for 6 weeks. Market is calm.
Action: Sell an iron condor to collect elevated premium.
Thesis: IV will likely mean-revert toward historical norms, benefiting the short premium position.
Example 2: Low IV Percentile Trade
Stock XYZ has IV Percentile of 15%. The stock has been quiet but is in a sector showing increasing activity.
Action: Buy a straddle or strangle.
Thesis: Volatility is likely to increase from these depressed levels. Cheap options provide asymmetric upside.
IV Percentile Thresholds for Trading
| IV Percentile | Interpretation | Typical Action |
|---|---|---|
| 0-20% | Extremely low IV | Strong buy premium signal |
| 20-40% | Low IV | Lean toward buying premium |
| 40-60% | Normal IV | No strong edge; focus on direction |
| 60-80% | Elevated IV | Lean toward selling premium |
| 80-100% | Extremely high IV | Strong sell premium signal |
Where to Find IV Percentile
Not all platforms show IV Percentile (many show IV Rank instead):
- ThinkorSwim: Shows "IV Percentile" in trade tab
- TastyTrade: Shows "IV Rank" (their version is closer to percentile)
- Market Chameleon: Shows both metrics
- Option Alpha: IV Percentile in screeners
Track Your Options Performance
Pro Trader Dashboard helps you analyze how volatility levels affected your trades and improve your strategy.
Common Mistakes to Avoid
- Confusing IV Rank and IV Percentile: They measure different things
- Ignoring the reason for high IV: Sometimes elevated IV is justified
- Assuming mean reversion is immediate: High IV can stay high
- Only looking at IV Percentile: Combine with chart analysis and fundamentals
- Trading every extreme reading: Be selective and patient
Summary
IV Percentile measures what percentage of days over the past year had lower implied volatility than today. Unlike IV Rank, it is not distorted by extreme one-time spikes and provides a more accurate picture of where current volatility stands historically. Use high IV Percentile readings (above 60%) to identify premium-selling opportunities and low readings (below 40%) for premium-buying strategies. Always combine IV Percentile with analysis of why volatility is elevated or depressed before making trading decisions.
Learn more about IV Rank or read about high IV trading strategies.