In options trading, it’s important to know how expensive or cheap options are relative to history. One of the simplest tools for measuring this is IV Rank (Implied Volatility Rank).
What Is IV Rank?
IV Rank measures where a stock’s current implied volatility sits relative to its range over the past year (typically 52 weeks).
The formula is:
An IV Rank of 0% means current implied volatility is at its lowest point in the past year.
An IV Rank of 100% means it’s at its highest.
IV Rank Categories and Meanings
0–25% (Low IV Rank): Options are cheap. The market expects little volatility.
25–50% (Moderate IV Rank): Options are fairly priced. Neutral conditions.
50–75% (High IV Rank): Options are expensive. The market is pricing in big potential moves.
75–100% (Extreme IV Rank): Options are very expensive. Fear or uncertainty is elevated.
Low IV Rank Trading Strategies
When IV Rank is low, options are relatively cheap. This is when buying premium often makes sense:
Long Calls / Puts: Straight directional bets are more attractive because premiums are cheaper.
Debit Spreads: Vertical call or put spreads allow directional exposure at reduced cost.
Calendars / Diagonals: Benefit from low current IV and the possibility of IV expansion.
High IV Rank Trading Strategies
When IV Rank is high, options are expensive. This is when selling premium often works best:
Short Straddles / Strangles: Profit from volatility collapsing back to normal levels.
Iron Condors: Defined-risk premium-selling in overextended IV environments.
Covered Calls: Enhance returns by collecting inflated premiums.
Advanced IV Rank Strategies
For experienced traders, IV Rank can be used to layer in advanced approaches:
IV Rank + Technical Analysis:
Combine IV Rank with chart setups.
Example: If a stock is in consolidation with IV Rank > 70%, iron condors become attractive.
IV Rank + Earnings Trades:
Options tend to price in large moves before earnings.
Selling volatility into high IV Rank before earnings, and then buying it back after the “IV crush,” is a popular advanced play.
IV Rank Mean Reversion:
High IV Rank often reverts lower once catalysts pass.
Low IV Rank often rises again when uncertainty re-emerges.
IV Rank Filtering and Stock Selection
IV Rank can also be used as a filter to narrow down trade candidates:
High IV Rank (>50%): Focus on premium-selling strategies.
Low IV Rank (<25%): Focus on premium-buying strategies.
Exclude middle ranges if indecisive: This helps allocate capital only when there’s an edge.
Most platforms allow screening stocks by IV Rank.
Common IV Rank Mistakes
Confusing IV with IV Rank:
High implied volatility doesn’t always mean high IV Rank. A stock may always trade with high IV (like biotech), but its IV Rank could still be low relative to its history.
Trading Without Context:
A high IV Rank before earnings is normal. It doesn’t always mean a good trade unless you account for the event.
Ignoring Timeframe:
IV Rank is backward-looking (52 weeks). Market conditions for the next 52 weeks can shift dramatically.