28
Mar

IV Rank

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 Next to our tools, IV Rank is obsolete, and it has been for many years now.

recent posts

Karen The Supertrader and James Cordier

Are You Picking Up Pennies IN FRONT OF FREIGHT TRAINS? Today’s topic is “Picking up pennies in front of freight trains.” Most option traders are guilty of doing this at some point, especially traders new to options.” Experienced traders usually stop after they get ran over or after they understand the risk involved. Most of […]

Bearish Options Strategies

  AN AWESOME APPROACH TO BEARISH MARKETS We do not see bearish markets too often, but when we do, we have to be fully prepared to: Protect our capital. Profit from market declines. More often than not, traders are not ready for bearish markets, so when they suddenly appear, they experience irreversible damages to their […]

icon
icon

tags

atm, bearish options strategies, Best Options Course, butterfly spread, calendar spread, call credit spreads, charm, credit spread, credit spread back test, credit spread options, credit spread strategy, credit spreads, day traders, defective imac, delta, full time options trading, gamma, greeks, high order greeks, imac, imac problems, implied volatility, iron condor, iv rank, james cordier, karen the supertrader, learn options, learning options course, leverage, low risk options trading, mirage, option strategy, option trading, option trading checklist, option trading lifestyle, option trading mindset, option trading myths, option trading profits, optioncolors, optioncolors software, options analysis, options course, options learning course, options strategies, options trader, options trading, options trading course, options trading newsletter, options trading performance, options trading software, otm, pop, popular option trades, portfolio margin, portfolio margin trading, probabilities, probability of profit, profitable, review, San Jose Options, san jose options review, scalable, short strangles, sj options review, spread, spreads, strangle, strategies, tasty trade, tasty trade credit spread, tasty trade credit spreads, tasty trade iv rank, tasty trade ivr, tastytrade, tastytrade credit spreads, tastytrade strangles, tastytrade verticals, technical, testimonial, theta, time decay, trading volatility, training, unbalanced condor, vanna, vega, veta, vomma, weekly credit spreads