Implied volatility (IV) is a forward-looking expectation of price fluctuation. This is derived from an option pricing model and carries great importance in the pricing of options. However, due to multiple inputs in option pricing models, IV can (and typically does) constantly fluctuate.
Beyond the actual reading of IV, there are ways to dig deeper to determine just how high current IV is compared to historic IV. Two common ways of doing this are through IV rank and IV percentile.
IV Rank
IV rank measures where current implied volatility stands in relation to the range it has been in for a given period of time. The max rank is 100 and the minimum rank is 0.
For example, suppose the past four IV readings were 20, 22, 35 and 40. A new reading of 20 IV would have a rank of 0 since it’s at the lowest end of the range, whereas a reading of 40 IV would have a rank of 100 since it’s at the top of the range.
IV Percentile
IV percentile measures what percentage of historic implied volatility readings are above and below current IV. The max IV percentile is 100% and the minimum IV percentile is 0%.
For example, suppose the past four IV readings were 20, 22, 35 and 40. If the next reading of IV were 37, it would mean that reading is above 3 of the 5 readings. The latest reading would place it 4th highest out of the 5 readings, so it would be in the 80th percentile.
Both IV rank and IV percentile offer comparisons between current IV and historic IV.
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