Knowing that a stock has 40% implied volatility does not tell you much by itself. Is 40% high or low for that particular stock? This is where IV Rank comes in. It gives you the context you need to make smarter options trading decisions.
What is IV Rank?
IV Rank (IVR) measures where current implied volatility falls within its historical range over the past year. It tells you if IV is high, low, or somewhere in between relative to the stock's own history.
Simple definition: IV Rank answers the question: "Compared to where IV has been over the past year, how high or low is it right now?" The answer is a number from 0 to 100.
How is IV Rank Calculated?
The formula is straightforward:
IV Rank Formula
IV Rank = (Current IV - 52-Week Low IV) / (52-Week High IV - 52-Week Low IV) x 100
Example: Current IV is 35%. The 52-week low was 20%. The 52-week high was 60%.
IV Rank = (35 - 20) / (60 - 20) x 100 = 15 / 40 x 100 = 37.5%
Interpreting IV Rank
IV Rank tells you where current IV sits in its historical range:
- IV Rank of 0: Current IV equals the 52-week low (lowest it has been)
- IV Rank of 100: Current IV equals the 52-week high (highest it has been)
- IV Rank of 50: Current IV is exactly in the middle of its range
What the Numbers Mean
- 0-20: Very low volatility, options are cheap
- 20-40: Below average volatility
- 40-60: Average volatility range
- 60-80: Above average volatility
- 80-100: Very high volatility, options are expensive
Why IV Rank Matters
Comparing raw IV numbers across different stocks is meaningless:
- TSLA might have a normal IV of 50%
- JNJ might have a normal IV of 15%
- A 30% IV on TSLA is low; 30% IV on JNJ is extremely high
IV Rank normalizes this. A 70 IV Rank means volatility is elevated for that specific stock, regardless of the absolute number.
Practical Example
Stock A has current IV of 25% and IV Rank of 85%.
Stock B has current IV of 50% and IV Rank of 30%.
Even though Stock B has higher absolute IV, Stock A's options are more "expensive" relative to their normal range. You would prefer to sell premium on Stock A.
Using IV Rank in Trading Decisions
High IV Rank (Above 50%)
When IV Rank is elevated, options are expensive relative to history. Strategies that benefit:
- Sell iron condors: Collect elevated premium
- Sell credit spreads: Higher premium for defined risk
- Sell covered calls: Better premium on your shares
- Sell cash-secured puts: Higher income for taking assignment risk
Low IV Rank (Below 50%)
When IV Rank is low, options are cheap relative to history. Strategies that benefit:
- Buy calls or puts: Low cost for directional bets
- Buy debit spreads: Reduced cost for defined-risk trades
- Buy straddles/strangles: Cheap volatility exposure
- Calendar spreads: Buy cheap front-month options
IV Rank vs IV Percentile
These two metrics are often confused but measure different things:
| Metric | What It Measures |
|---|---|
| **IV Rank** | Where current IV falls in the range between yearly high and low |
| **IV Percentile** | What percentage of days had lower IV than today |
These can give different readings. If IV spiked once to 100% but usually stays between 20-30%, IV Rank might show 10% while IV Percentile shows 80%.
Which to use? Many traders prefer IV Percentile because it is not skewed by one-time spikes. However, IV Rank is more widely quoted and available on most platforms.
Finding Stocks with High IV Rank
To find premium-selling opportunities:
- Screen for stocks with IV Rank above 50% or 70%
- Look for elevated IV before earnings announcements
- Check sector-wide volatility during market stress
- Monitor biotech stocks before FDA decisions
Limitations of IV Rank
IV Rank is useful but not perfect:
Extreme Spikes Distort IV Rank
If a stock had one massive IV spike (like during a crash), the 52-week high becomes very elevated. This makes current IV Rank appear low even if volatility is above average most of the time.
Does Not Predict Direction
High IV Rank means options are expensive, not that IV will fall. Volatility can stay elevated for extended periods or spike even higher.
Stock-Specific Context Matters
A stock about to report earnings should have elevated IV Rank. This is normal and expected, not necessarily a signal to trade.
Best Practices for Using IV Rank
- Use it as a filter, not a signal: High IV Rank identifies candidates; other analysis confirms trades
- Consider upcoming events: Elevated IV before earnings is expected
- Combine with other metrics: Look at IV Percentile, historical volatility, and chart patterns
- Match strategy to IV environment: Sell premium in high IV, buy in low IV
- Check the underlying reason: Why is IV elevated? Is it justified?
Trade Selection Example
You want to sell iron condors. You screen for:
- IV Rank above 60%
- Stock price above $20
- No earnings in next 3 weeks
- Liquid options (tight bid-ask spreads)
This gives you a focused list of candidates where selling premium has a statistical edge.
Where to Find IV Rank
Most options trading platforms display IV Rank:
- ThinkorSwim: Shows IV Percentile in the trade tab
- TastyTrade: IV Rank prominently displayed
- Market Chameleon: Free IV Rank data
- Barchart: IV statistics available
- Option Alpha: IV Rank in screeners
Track Your Trading Performance
Pro Trader Dashboard helps you analyze your trades and understand how IV levels affected your results.
Quick Reference Guide
| IV Rank | Meaning | Preferred Strategy |
|---|---|---|
| 0-30% | Low volatility | Buy options, debit spreads |
| 30-50% | Average | No strong edge either way |
| 50-70% | Elevated | Start considering selling premium |
| 70-100% | High volatility | Sell credit spreads, iron condors |
Summary
IV Rank tells you where current implied volatility sits relative to its 52-week range. A high IV Rank means options are expensive compared to history, favoring premium selling strategies. A low IV Rank means options are cheap, favoring option buying strategies. Use IV Rank as a screening tool to identify candidates, then apply additional analysis before trading. Remember that IV Rank does not predict future volatility direction and should be combined with other factors for best results.
Learn more about IV Percentile or read about high IV trading strategies.