Raw implied volatility numbers are meaningless without context. Is 30% IV high or low? It depends on the stock. That is why professional options traders use IV Rank and IV Percentile - two metrics that put volatility in proper context. This guide explains both and shows you how to use them.
The Problem with Raw IV
Every stock has its own "normal" level of implied volatility. A utility stock might normally trade at 15% IV, while a biotech stock might normally trade at 60% IV. If both stocks currently show 35% IV:
- For the utility stock: 35% IV is extremely high - options are expensive
- For the biotech stock: 35% IV is quite low - options are cheap
The solution: IV Rank and IV Percentile compare current IV to that stock's own historical IV range, giving you context-adjusted metrics that work across all stocks.
What is IV Rank?
IV Rank (IVR) tells you where current IV falls within its 52-week range. It is calculated as:
IV Rank Formula
IV Rank = (Current IV - 52-week Low IV) / (52-week High IV - 52-week Low IV) x 100
- Result is a number from 0 to 100
- 0 means IV is at its 52-week low
- 100 means IV is at its 52-week high
- 50 means IV is exactly halfway between its high and low
IV Rank Calculation Example
Stock ABC:
- Current IV: 35%
- 52-week Low IV: 20%
- 52-week High IV: 60%
IV Rank = (35 - 20) / (60 - 20) x 100 = 37.5
Current IV is 37.5% of the way between its yearly low and high.
What is IV Percentile?
IV Percentile (IVP) tells you the percentage of days over the past year that had IV lower than today's IV. It answers: "What percentage of the time was IV below current levels?"
IV Percentile Interpretation
- IV Percentile of 80 means IV was lower than today on 80% of days in the past year
- IV Percentile of 20 means IV was lower than today on only 20% of days
- Higher IV Percentile = current IV is relatively high
- Lower IV Percentile = current IV is relatively low
IV Rank vs IV Percentile: Key Differences
While both metrics serve similar purposes, they can give different readings:
- IV Rank: Sensitive to extreme highs and lows. If a stock spiked to 100% IV once, the current 40% IV might show a low IV Rank even if it is usually at 25%.
- IV Percentile: Looks at frequency, not magnitude. Shows how often IV has been below current levels, regardless of how high or low the extremes were.
When They Differ
Stock had a single IV spike to 80% during a market crash but normally trades between 20-30%:
- Current IV: 30%
- 52-week low: 18%
- 52-week high: 80%
IV Rank = (30-18)/(80-18) x 100 = 19 (suggests IV is low)
IV Percentile might be 75+ (because IV was below 30% most days)
In this case, IV Percentile gives a better picture of reality.
Which One Should You Use?
Both metrics have value, but many professional traders prefer IV Percentile because:
- It is less distorted by one-time extreme events
- It better represents "normal" conditions
- It tells you how often you would have seen cheaper options
Best practice: Look at both metrics. When they agree (both high or both low), you have strong confirmation. When they diverge significantly, investigate why - usually a past extreme event is the cause.
How to Use IV Rank and IV Percentile in Trading
When IV Rank/Percentile is High (Above 50)
Options are relatively expensive. Consider selling premium:
- Credit spreads (put or call)
- Iron condors
- Short strangles or straddles
- Covered calls
- Cash-secured puts
When IV Rank/Percentile is Low (Below 30)
Options are relatively cheap. Consider buying premium:
- Long straddles or strangles
- Debit spreads
- Long calls or puts
- Calendar spreads (buy the back month)
Practical Trading Example
You are considering selling a put credit spread on Stock XYZ:
- Current IV: 42%
- IV Rank: 68
- IV Percentile: 72
Both metrics are elevated (above 50), indicating options are relatively expensive. This is a favorable environment for selling the put spread - you will collect more premium than usual.
Common Thresholds Traders Use
While there are no universal rules, many traders use these guidelines:
- IVR/IVP above 50: Favor selling strategies
- IVR/IVP above 70: Strong preference for selling
- IVR/IVP below 30: Favor buying strategies
- IVR/IVP below 20: Strong preference for buying
- IVR/IVP between 30-50: Neutral zone, direction matters more
Screening for Trades Using IV Rank
Many traders scan the market for extreme IV Rank readings:
- High IV Rank scan: Find stocks with IVR above 60-70 for premium selling opportunities
- Low IV Rank scan: Find stocks with IVR below 20-30 for buying cheap options before potential moves
- Combine with other criteria: Filter by sector, liquidity, upcoming events, etc.
Important Caveats and Warnings
- IV can stay high or low for extended periods: High IV Rank does not mean IV will drop tomorrow
- Events justify high IV: Before earnings, high IV Rank is normal and appropriate
- Underlying movement still matters: Even with high IV Rank, a big stock move can hurt short premium positions
- Different platforms calculate differently: Some use 30-day, some 52-week lookback periods
- New stocks lack history: IV Rank needs historical data to be meaningful
Building an IV Rank-Based Trading Process
- Check IV Rank/Percentile first: Before placing any options trade, look at these metrics
- Match strategy to environment: High IV = sell, Low IV = buy
- Look for extremes: The best setups are at IVR extremes (above 70 or below 30)
- Verify no upcoming events: Make sure high IV is not justified by earnings, etc.
- Size appropriately: Even with favorable IV Rank, maintain proper position sizing
See IV Rank at a Glance
Pro Trader Dashboard displays IV Rank and IV Percentile for every stock, making it instant to identify when options are cheap or expensive. Find the best volatility trading setups automatically.
Summary
IV Rank and IV Percentile are essential tools that put implied volatility in context. IV Rank shows where current IV falls within its 52-week range, while IV Percentile shows how often IV has been below current levels. Use both metrics to determine whether options are relatively cheap (favor buying) or expensive (favor selling). While these metrics provide valuable guidance, remember that IV can stay elevated or depressed for extended periods, and underlying stock movement still determines ultimate profitability.
Ready to apply these concepts? Learn about volatility crush trading or explore implied volatility trading strategies.