IV Rank and Liquidity Rank
By OptionsPlay
September 23, 2021
What is IV Rank?
Implied Volatility Rank or IV Rank is a measure to determine how cheap or expensive stock or ETF options are based on their implied volatility (IV). It compares the current implied volatility to the implied volatility of the underlying over the past 365 days.IV Rank is measured on a scale from 0 to 100 where values closer to 0 indicate that the IV of the underlying is low, while values closer to 100 indicate that the IV of an option is high which will result in option prices being more expensive.
IV Rank is a metric of measuring implied volatility and gives a good sense of how high the IV of a stock is in relation to its own historic volatility over the previous 365 days. This is particularly useful as some stocks are more volatile than others at baseline making it difficult to compare volatility between different stocks. The IV Rank is calculated by taking the highest and lowest volatility figure over the past 365 days and compares it to the current implied volatility. IV Ranks close to 100 mean that the stock is at near the highest implied volatility over the past year and IV Ranks near 0 tell investors that the implied volatility of the stock is near the lowest point over the past 365 days. As a general rule of thumb, IV Ranks above 50 are considered expensive, and below 50 are considered cheap.
For example, if stock XYZ’s implied volatility over the past year has ranged from 30% to 50% and the current implied volatility is exactly halfway between the low and high at 40%, then the current IV Rank would be 50%.
If in the same example, stock XYZ’s implied volatility is at 30%, then the IV Rank would be 0%
What is the Liquidity Rank?
There are over 4200 underlying symbols that have listed options in the US. However, over 85% of those symbols have an open interest of under 100 contracts across all strike prices. It is important to identify the most liquid symbols for options trading when placing a trade. OptionsPlay’s easy 1, 2, and 3 rankings provide all users with a gauge for the liquidity of a symbol for options trading.
1 – Very Liquid – Place orders starting at themid-pointand executions should occur within 2-3 cents off of the mid-point.
2 – Somewhat Liquid – Place orders at starting at themid-pointand executions should occur within 5-10 cents of themid-point.
3 – Not Liquid –Transaction costs on these symbols may be sizable, start at the mid-point but may require a 10+ cent markup before executions occur.
How to Use IV Rank and Liquidity Rank
The rule of thumb is to buy options that have a low IV and sell options that have a high IV. Options with a low IV require less premium to be paid and work well for strategies such as long calls and puts or debit spreads. However, when IV is high, options become more expensive and selling options become the optimal strategy as more premium is received by the option seller. The option seller can use strategies such as short calls and puts or credit spreads.
Liquidity should be used to estimate how close to the mid-point the order will be executed at. Orders that are executed close to the mid-point will have a better risk/reward and give you an edge over
OptionsPlay has introduced a new IV Rank & Liquidity Indicator to the platform. You will be able to see each stock or ETFs IV Rank and Liquidity Ranking within the Quote Bar.
FAQs
Traders that are pessimistic like to buy put options as a hedge. This raises the IV of put options, indicating bearishness. Similarly, when traders do not protect themselves vigorously against strong market changes, their IVs fall. The majority of traders are comfortable with IVs of 20% to 25%.
What does IV rank mean in options? ›
What Is Implied Volatility (IV) Rank? Implied volatility rank (aka IV rank or IVR) is a statistic/measurement used when trading options, and reports how the current level of implied volatility in a given underlying compares to the last 52 weeks of historical data.
Is high IV bad for options? ›
IV can change often and will vary from one option to the next, even when the options are on the same underlying stock. All else equal, the higher the IV of an option, the higher the options premium, and therefore a bigger expected price change in the underlying stock.
How to interpret IV in options? ›
IV doesn't predict the direction in which the price change will proceed. For example, high volatility means a large price swing, but the price could swing upward (very high), downward (very low), or fluctuate between the two directions. Low volatility means that the price likely won't make broad, unpredictable changes.
Should you buy options when IV is low? ›
When you discover options that are trading with low implied volatility levels, consider buying strategies. Such strategies include buying calls, puts, long straddles, and debit spreads. With relatively cheap time premiums, options are more attractive to purchase and less desirable to sell.
Is low IV good for options? ›
If all stocks are showing low IV Percentile, then there might not be much of an edge in buying volatility on a specific stock. But, if general market implied volatility is high, that could be a good time to buy cheap volatility in some of the names above.
How much IV is too much? ›
Put simply, IVP tells you the percentage of time that the IV in the past has been lower than current IV. It is a percentile number, so it varies between 0 and 100. A high IVP number, typically above 80, says that IV is high, and a low IVP, typically below 20, says that IV is low.
Is higher IV better for options? ›
Implied volatility is derived from options prices, so changes in options prices affect IV. High IV environments allow traders to collect more premium, or move strikes further away from the stock price and still collect a decent premium for short options strategies.
How to calculate IV options? ›
Implied volatility is calculated by taking the observed option price in the market and a pricing formula such as the Black–Scholes formula that will be introduced below and backing out the volatility that is consistent with the option price given other input parameters such as the strike price of the option, for ...
Is high IV good for calls? ›
The higher the implied volatility (IV), the more uncertain the stock's future price is, which is reflected as an increase in the option's value. This allows you to capture a larger credit on the calls you would like to write.
Since future and options trading involves trade settlement at the pre-determined price in the future, hence IV plays a vital role in F&O trades. So if Nifty is trading at 18000 and the ATM strike price has an IV of 10%, this means that the index value can move in the range of 16800-19200 annually.
Is implied volatility bullish or bearish? ›
Implied Volatility meaning and function
In the stock market, Implied volatility increases in a bearish market when share prices are expected to fall over time. In a bullish market, IV decreases as volatility falls, and prices are expected to increase over time. IV cannot predict the direction of the price fluctuations.
What is a good delta for options? ›
At-the-money options usually have a Delta near –0.50. The Delta will decrease (and approach –1.00) as the option gets deeper ITM. The Delta of ITM put options will get closer to –1.00 as expiration approaches. The Delta of out-of-the-money put options will get closer to 0.00 as expiration approaches.
What is 30 day implied volatility? ›
30-Day Implied volatility (IV) refers to the forecasted magnitude, or one standard deviation (SD) range, of potential movement away from the underlying price in a 30-day period.
Is high IV good for option buying? ›
Implied volatility is derived from options prices, so changes in options prices affect IV. High IV environments allow traders to collect more premium, or move strikes further away from the stock price and still collect a decent premium for short options strategies.
Is 30% IV high? ›
While your unique trading strategy will deem what is “low” or “high” IV, here are some basic guidelines: Low IV: below 30% Average IV: between 30% and 70% High IV: above 70%
What is considered high volatility? ›
If the price of a stock fluctuates rapidly in a short period, hitting new highs and lows, it is said to have high volatility.
