Difference between IV Rank & IV Percentile

8 Jun

IV Rank and IV Percentile

IV percentile is a measure of implied volatility vs its past values. This is best explained by an example: If IBM IV percentile is 34% – It means that current IV value is higher than 34% of previous values (and of course, lower than 64% of them).

IV Rank is also a measure of implied volatility vs its past values, but it looks only at the highest and lowest values. The formula is:

[IV – Lowest_IV]
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[Highest IV – Lowest IV]

If IV values are not too extreme and the look-back period is long enough (about a year) then values will be very similar, but we feel that IV percentile is a better indicator and is more robust (albeit harder to calculate).

This simplified example can will show the difference between the calculations:

IV-Rank-Vs-Percentile

Assuming 4 past IV values, we calculated the rank and percentile for a new IV value – 15. When calculating the IV rank, we can see that 15 is exactly the middle between the highest and lowest IV values, and Thus the rank will be 50%. We can also see that 15 is larger than 3 past values out of the four values in our set, so the rank will be 75%.

Source: OptionSamurai

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