What’s it all about? Why is it important?
IV Rank is a term that has been around the options industry since the beginning of options trading. It’s nothing new and it’s nothing revolutionary, but it has been the topic of discussion a lot recently.
It is important to understand what it represents and also what it does not.
IV Rank is simply a method to look at a 52-week implied volatility chart of an underlying asset and then rank where the current volatility is in respect to its 52-week high and low, putting it into a percentage, thus the IV Rank. It’s a long-term, relative implied volatility for the underlying product.
Since option pricing is relative to implied volatility levels, then the IV Rank gives the option trader insight to the value of options, whether they are overpriced or under valued. However, IV Rank is very general and does not work as accurately as one might think it does.
Shortfalls of the IV Rank
For example, within a 52-week period the implied volatility may have an extremely high point due to short-term volatile period of the underlying. This could make the current IV Rank of the underlying very low, such as an IV Rank of 20. In this case the trader will be led to believe there is no opportunity to sell options on the underlying because of such a low IV Rank. Similarly, there could be an extreme low in the 52-week IV chart, creating a false “high IV Rank” for the underlying product.
The problem with the IV Rank formula is that there are many volatility opportunities to trade that are not recognized by the formula, and many false signals are given.
Another shortfall of the IV Rank formula is that it loses its relative value, which is its entire purpose, when the current volatility is at a high or low. Since the IV Rank does not go above 100 or below 0, relativity is lost entirely during these times.
Trading With Low IV Rank
SJ Options averaged over 4% per month for 2014 & 2015 without a single loser, trading assets with very low IV Ranks. This is just an example of how the traditional IV Rank formula can be entirely irrelevant and inaccurate.
IV Rank is very general and can be misleading. In order to truly take advantage of implied volatility levels, one must have more sophisticated tools, such as the Patent-Pending volatility tools created by SJ Options. While ordinary software touts the importance of IV Rank, it doesn’t compare to the tools we offer. Next to our tools, IV Rank is obsolete, and it has been for many years now.