Implied Volatility Rank IVR

Implied Volatility Rank IVR

One useful feature for options traders is the Implied Volatility Rank - IVR. The IVR measures the current Implied Volatility level and compares to its most recent range. So, it compares the Volatility against itself. It is useful because it is normalized, which means that you can use it to compare the IVR from different underlying and different periods.

The Formula we use for IVR:

IV Rank is the description of where the current IV lies in comparison to its yearly high and low IV. IV Rank is the description of where the current IV lies in comparison to its yearly high and low IV.

What period do you use for IVR?

We use one year IVR.

Not to be with confused with IV Percentile

IV Percentile tells the percentage of days over the past year, that was below the current IV.

eDelta Approach

How can you use IVR on your backtests?

On Stock Options, we like to use IVR as a proxy for earnings trades. Volatility tends to rise significantly just before earnings and then collapses after earning. So you can use the IVR filter combined with the DTE to trade during earnings or avoid earning trades, depending on your preferences.

Also, IVR entry filter allows us to compare trading every day, versus entering the trade only when IV is high. In many instances, you can observe that the high volatility strategy achieves the same or similar returns with a significantly lower number of occurrences. Thus, less time exposed to the market with the same returns. This adjustment works best on specific underlying, usually high volatility ETF.