lystn

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “What is implied volatility rank or what’s commonly referred to as IVR?” IVR is way for us to normalize implied volatility readings across different ticker symbols and ETFs to get basically an apples to apples comparison. When we are looking at a trade and we are searching for and scanning for high implied volatility setups, it’s not enough in our particular case to search just for the highest implied volatility securities because high implied volatility for one security could be low implied volatility for another. If I told you that a security’s implied volatility reading was 30%, that has no context whatsoever if I didn’t tell you where 30% laid in its historical range. For a company like Tesla, 30% implied volatility might be insanely low. For a company like ExxonMobil or GE, 30% implied volatility might be insanely high. What we do is we overlay implied volatility ranking to give us a context of where the current implied volatility reading lays in its historical range. For example, if we have one stock that has a historical range in its implied volatility of 1% to 30%, then we know that that range encompasses all of the implied volatility that it’s seen over the last year. And so, if we see a current reading of 15%, we can assume that that reading is in the 50th rank. It’s basically right in the middle of its historical range between 1% and 30%. Now, you take another stock and we see that that other stock has implied volatility that has range between 15% and 45%. Now, on the outside, you could definitely make the case that this stock has higher volatility than the first stock. However, if we see that the reading on the second stock for its implied volatility is 30%, we again, see that the reading is right at the 50th rank. Using IVR, we’ve now neutralized and put both of these stocks on the same metric and playing field which is ranking its implied volatility against itself over the last year and we see that both stocks are actually middle of the range for their implied volatility. No stock is necessarily more volatile or less volatile than the other and option pricing should reflect this. Hopefully this helps out. As always, if you guys have any questions, let us know and until next time, happy trading.