You should leave this article knowing 2 things:
- What is IVR
- How you can use this metric to make more money and trade SMARTER
What is IVR?
Implied volatility rank, IVR, is arguably one of the more important trading metrics to look out for if you want to make more successful option trades. IVR, quite literally, ranks a stocks current volatility based on the annual performance of a stock.
Example:
So where does 40 fall in this range?
From this image, you can see the math behind IVR if you are interested. More importantly however, you can see where the current volatility of 40 falls in the range of how volatile stock XYZ has been in the past.
To conclude:
Implied volatility rank shows us where volatility is in comparison to where implied volatility has been in the past.
How You Can Use IVR To Make Better Trades
1. Understand the difference between IV and IVR
If you have been in the trading game for a little you may have seen/ heard of the importance of trading options around implied volatility, or IV. However, this metric does not give much context. A stock could have an IV of 60, but in the past has ranged between 60 and 100. 60 in this case would be considered low. If in the past the IV ranged from 20-60, an IV of 60 would be considered high. IV alone, again, gives us no context. This is why you should always look at IVR when making decisions.
Not to say that IV is a bad metric, IVR just tells us a little more and should be looked at in addition to IV.
2. How to analyze IVR to make better trades
As you may know, option prices are positively correlated to volatility. So when volatility rises, option prices rise, and when volatility contracts, option prices fall. Quite simply, if a stock has a high IV rank you should consider a selling strategy, and if the latter you should considering a buying strategy.
Summary
If you choose to ignore IVR this does not mean you are completely screwed. I personally always base my trades around IVR, but have seen trades perform well that have a disregard for this metric. However, IVR is a metric which can be used to optimize your portfolio. When trading on IVR you may see larger and faster profits due to extrinsic value. IVR does not however determine whether your trade will win or lose.