 Hey everyone, thanks for joining today. In this video we're going to be talking about IV rank versus IV percentile IV standing for implied volatility. We're going to look at how these two indicators play into options trading and more specifically options pricing to figure out how you can use these two to guide your options trading in the future. So we've had some questions in the community about IV rank and IV percentile, the difference between them, when to use them, and how to measure IV for certain indices, ETFs and futures. So we want to start with explaining the difference between IV rank and IV percentile. Up on my screen here I have Thinkorswim. This is the SPX one year one day chart and below here is a navigation trading indicators green IV rank and IV percentile both expressed linearly with graphs at the bottom here. So you can see there they are correlated but a lot of times they're different. When we're looking at either of these these indicators if one of them is over 50 we're looking at a higher volatility environment. And you can see on the graph here when volatility is spiking with the IV rank and IV percentile you can see large moves in both direction. And then this is earlier in this year February of 2023 and later in this year as there's been a bullish push over the last couple months here starting in the mid to end of or the end of October things are going up seemingly continuously and because of that volatility is coming down both the IV rank and percentile. So let's define both and look at how they're interpreted and then look at the differences between the two. IV rank is going to be comparing the current IV implied volatility to the highest and lowest levels over the past 252 trading days one year. Now both the IV rank and IV percentile are using 250 days or the last trading year as there about 252 days in the trading calendar year. Biggest difference you'll see right away one is expressed as a number IV rank from 0 to 100 and IV percentile is a percentage obviously 0 to 100 as well. That number for IV range is going to indicate the current implied volatility's position within its high and low range. You can see the formula here and it's going to give you a number that represents where the current IV stands relative to its range in the last year. So how to look at this the higher the IV rank closer to 100 is going to suggest that the current IV is close to its highest level over the past year and the lower IV rank closer to 0 is going to tell you that it's closest to the lowest level in the past year. So the IV rank is looking at where the IV is relative to the high and low of the year. What the IV percentile is going to tell you is the percentage of days in the past 252 trading days where IV was below the current level. So it's going to give you a broader view of the historical distribution of IV and is calculated as such. Now here's where you can draw the distinction. This calculation is going to tell you the percentage of days where IV was below the current level not where it is compared to the spread of the high and low of the last year but the amount of days that are below the current level. So a high IV percentile closer to 100 is going to tell you that a high percentage of the days in the past year the IV was below the current level. Conversely low IV percentile closer to 0% suggests that the current IV is higher than it has been most days over the past year. So IV rank is going to focus on the specific high and low range of IV over the past year where the IV percentile considers the overall distribution of IV across all days in the past year. This means the IV rank is going to be IV rank will be more in regards to the extremeness of the current IV compared to its own historical levels while the percentile gives a broader context by showing how often over that past year IV has been below the current level. So you can see the correlation here and a lot of times where IV is pretty much in lockstep especially around the contractions and expansions but what are the situations and why is this happening where you know IV rank and IV percentile have such a big spread or are somewhat different. You're looking at here you know IV rank let's see in March of this year is at 42 and IV percentile is at 58 so this isn't exactly exactly apples apples comparison here but you know you kind of see a spread here on 927 between IV rank and IV percentile. So give us an example of how this can happen. So you see on the screen here we're looking at a current implied volatility of 25 percent past year's high IV of 40 and the past year's low IV of 10. So those last two figures will only use the calculate IV rank. The current implied volatility is the only thing from today that we're going to use in that current implied volatility calculation. So let's see the IV rank calculation here we're looking at 37 percent so that would be 38 indicating the current IV is going to be below the midpoint of last year's high and low range you know represented here by 38 out of 100. The IV percentile so out of those past 252 days there were 50 days where IV was below 25 gives you an IV percentile just around 20. So the difference here the IV rank of 38 is in suggests the current IV is within the mid range of its yearly high and low but in the IV percentile IV percentile it'll tell you that the current IV is higher than it has been on most days of the year. So this is kind of giving you a where does it fall in the range and ranks at with ranking and the percentile gives you a ratio expressed in a percent of the amount of days that were below a certain point. So what's an easy way to remember this well try this thinking of IV rank like a ranking in sports and IV percentile like a percentage of days in sports rankings the teams are going to be compared to their historical performance throughout the season and similarly IV rank is going to compare to the current IV IV level to its high and low same with the highs and lows of a team within a certain period like a season providing a rank within that range. IV percentile as a percentage of days percentages often represent a portion of a whole a ratio like I mentioned IV percentile tells you the percentage of days within the specified period where IV was below that current level. So we'll see in just a second about using VIX as another way to show implied volatility but I'll just pull it up here for one second but another one of the questions that we got was you know how do we measure implied volatility in and ETFs and stocks and futures and not just you know index funds or indices like SBX. So this navigation trading tracker that shows the IV rank and percentile can also be used in ETFs with stocks and also with futures themselves and actually this is or sorry that's the VIX futures so that's a bit messy but let's see another futures here there we go at the bottom another couple ways you can besides the VIX there's like we said the VIX futures and the new VIX one day chart which won't give you the indicator at the bottom but we'll get to that in just a second also within the options chain let's take a look here this might have been pointed out in other videos but for each option chain the DS21 DS22 weeklies and quarterlies you actually see the IV percentile in the left here and then on the right you see the expected move of the stock so that's you know for tomorrow SPX is expected to go anywhere up to say 29 or 28 and a half points up and 28 and a half points down now that's going to be the standard distribution so I believe you know if you're looking at that kind of on that bell curve you would have about a 68.3 I believe percentage that within that range you know that that index SPX will fall into that range and you can see these you know same kinds of things in the option chain certain options cycles are going to be more volatile and have more IV than the other ones you know we talk about this in our calendars courses but each one of them is going to have the implied volatility and the expected move for that cycle so right now we're looking at thinkorswim I wanted to pull this up to start to look at how implied volatility can be measured on the left here this is SPX these are some these are some charts down here that we'll get to in just a minute a couple different indicators that you could use this is VIX and this is the volatility index that is a pretty widely used way to measure market expectations for future volatility a lot of times you'll hear investors or analysts refer to this as a fear gauge and what it is is going to be representing the market's consensus on the anticipated volatility of the S&P 500 index represented by SPX on the left here over the next 30 days time so might go without saying but a higher VIX is going to suggest a greater expected movement or turbulence in the market while lower VIX usually tells you that the perception is relatively stable or predictable so looking at VIX on the right here and SPX on the left actually have a an on-demand view December 13th 2023 so you can see on the SPX here all through the months of November and December we've had a pretty high bull market where you know SPX among many other indices is on a steady rise without many days of big lows you can also see that in the relative strength index and you know this is SPX at the time and actually in real time is at the high of the year so as you see you know VIX on the right kind of start to fall what that's telling you is that there isn't a lot of fear in the market right a lot of people are putting money into the market continuing to put more money and seeing bigger returns therefore less fear as SPX and many of the other many of the other indices continue to rise when you're looking at you know February and March of this year you see VIX is spiking the highs of 30 of the year where you know now we're down to the low teens and as low as you know 11.81 here so if you look at VIX on the right and what's happening here you follow that February and March time frame that's a lot of volatility meaning a lot of moves up and down left up and down as we go left to right here and it's harder for investors at the time in that February and March period to really understand or think they can predict what's happening that's a much different situation that we have going on here now from November to December where there's not a lot of fear in the market VIX is going down and an important thing about VIX is that you know it's it's a key factor or IV I should say and VIX as a as a byproduct is a key factor for influencing auction pricing you know we talked about it reflecting the level of uncertainty or risk that's perceived by the market but what is the impact on options prices of the VIX or IV well the two are pretty much directly correlated higher implied volatility is going to generally lead to higher options premiums or prices which you know we talked about that means increased market uncertainty so by selling options at a higher price you are taking on more risk as the auction seller or by buying them at the higher price again there is more risk there's more to lose there where lower implied volatility will tend to results in lower options premiums again that's you know taking on less risk or lower perceived risk of selling or buying options contracts one more thing to point out here so you know as you see periods where IV is spiking and then falling that's what we talked about IV contracting see here's one here here's another one you know you see these in the IV rank and IV percentile and you can see them in VIX too right this is the one year one day chart but if you were to go into sorry you know 180 day five minute chart for VIX at that at last week you see days of VIX contracting and falling you know many of the option strategies that we're selling and then buying back we want to sell high and buy back low right for the options pricing and that can be VIX or implied volatility measures the options contract pricing and that's what we're looking to do is you know look at selling when VIX is high and buying back when VIX is low so traders use IV and VIX to make decisions about entering or exiting options and which strategies to use that's just an example but you know you'll see more of this as you go on in the courses