A Day Trader’s Options Trading Manual
IV Rank and IV Percentile are two important indicators used for options trading against which the current level of IV can be compared by traders. By applying such tools, the traders will be in a position to determine whether options are overpriced or undervalued in order to make good decisions. As we progress through this blog we will be analyzing these concepts, their computations as well as their use cases with input provided by the TalkOptions platform.
> What is IV Rank?
Implied Volatility Rank (IV Rank) refers to a comparison of the current IV of an asset for a particular stock or index with the historical IV index for the past 252 trading days (one year). It is a centerpiece of the valuation method, accounted for as a percentage from actual trading returns and gives a straight outlook on whether options are overpriced or under-priced compared to history.
> Understanding IV Rank
High IV Rank (Close to 100): Points out that IV is at or close to the highest value in the last year, meaning that options are rather costly.
Low IV Rank (Close to 0): It postulates that the current IV is almost as low as it can get and hence, options must be cheap.
> How is IV Rank Calculated?
The formula for IV Rank is:
IV Rank = Current IV - Lowest IV/ Highest IV - Lowest IV X 100
For example:
A high IV rank of 60% ,low IV rank of 20% and current IV rank of 40% are common with stocks. This is actually an indication that the current IV is roughly the middle of its historical values.
> Practical Use of IV Rank
When IV Rank is High (Above 50):
Thanks to these high IV options, traders can use various selling strategies such as Short Straddles.
When IV Rank is Low (Below 50):
Businessmen may fancy buying formations such as Calendar Spreads, for instance, options are comparatively inexpensive, and thus, possibility to make profits in situations that govern high volatility.
> What is IV Percentile?
IV Percentile denotes the number of days in the past that had a lower than present IV for an asset. IV Rank is different from IV Percentile in the point that the latter determines how often the IV was below its current state over a given period of time.
> Understanding IV Percentile
High IV Percentile: Is greater than IVs most days in the past year, signaling costly choices.
Low IV Percentile: Records that the current IV is smaller to the IV on most days implying existence of cheaper stocks.
> How IV Percentile is calculated?
The formula for IV Percentile is:
IV Percentile= Number of Days IV was Below Current IV/Total Trading DaysX100
For example:
For a current IV of 35 percent, if IV was below this level on 180 of the 252 trading days, the IV Percentile would be 71.
> IV Rank and Percentile on TalkOptions
The TalkOptions platform allows analyzing both IV Rank and IV Percentile with solid tools, which gives the traders actionable insights:
Key Features
Top Gainers and Losers
Traders can view F&O (Futures and Options) stocks that have experienced the highest or lowest price movements by using the IV Percentile Screener NSE.
Timeframe Flexibility
Analyze High IV and High IV Percentile data over different periods, such as 1-month, 3-months, 6-months, and 1-year.
High and Low IV Levels
The traders can easily identify the stocks with the highest and lowest implied volatility levels for targeted strategies.
Practical Examples
Example 1: High IV Rank
For instance the NavinFluorine has the live IV of 68.71 and the IV Rank of 90%. This means that its current IV is almost at the highest level attained in the last one year. High premiums can be taken advantage of by traders in different ways; and one of which is the Short Straddles.
Example 2: Low IV Percentile
If a stock’s IV Percentile is 15%, this implies that its current IV is lower than that of the stock for most of the time in the past year. Businessmen might use Calendar Spreads or other purchase strategies to make money in case of an increase in volatility.
> Difference Between IV Rank and IV Percentile
Aspect | IV Rank | IV Percentile |
Focus | Compares current IV to historical high/low range | Measures percentage of days IV was below current IV |
Metric | High IV Rank (Expensive) / Low IV Rank (Cheap) | High IV Percentile (Expensive) / Low IV Percentile (Cheap) |
Application | Identifies extremes within a range | Identifies how common the current IV is historically |
> Using High IV Rank and Percentile for Strategy Selection
High IV Rank / IV Percentile
Strategies:
Short Straddles
Strangles
Iron Condors
Reason: Selling strategies are aggressively profitable because options premiums are overstated.
Low IV Rank / Low IV Percentile
Strategies:
Calendar Spreads
Long Straddles
Long Strangles
Reason: Options are inherently cheaper, and that is somewhat to the chagrin of option traders because this imbalance comes into play when there is more volatility.
IV Rank and IV Percentile are two imperative metrics for options traders because they provide differentiation between implied volatility and historical data. These kinds of metrics help the traders to know IV Percentile of Nifty, and know which stocks are having high IV levels and then do the right strategies using platforms like TalkOptions.
Whether you need an IV Rank list or use IV Rank and Percentile Calculator, understanding of these notions help turn into a proactive approach, fine-tune your trades, and control the risks in the constantly changing environment of options trading.