Volatility Analysis: IV / HV / IV Rank / IV Percentile

Implied volatility (IV) measures the market's forecast of a stock's potential price changes.

It is calculated using known variables such as the stock's current price, option premiums, interest rates, and the time remaining until option expiration, typically through a standard pricing model.

In essence, IV helps gauge the cost of options:

• high IV suggests they're pricier, while low IV indicates they're less expensive, all other factors being equal.

• Investors often adopt a strategy of buying options when IV is low and selling when it's high, aiming to stay delta neutral—unaffected by the stock's direction.

However, there's no universal benchmark for IV, its interpretation varies across stocks：

• For frequently traded stocks with minor price movements, a 30% IV could indicate high volatility.

• In contrast, for less traded stocks with large price swings, an 80% IV might be deemed low.

Thus, IV doesn't offer a one-size-fits-all prediction of a stock's future movement.

To help determine if implied volatility (IV) stands at a high or low level, use moomoo's Volatility Analysis.

This feature encompasses four metrics:

Implied Volatility (IV), Historical Volatility (HV), IV Rank, and IV Percentile.

It weighs the IV of individual options, reflecting the stock's overall volatility rather than that of a single option.

Let's now delve into how to use this feature.

1. How to find [Volatility Analysis] on moomoo

Detailed Quotes of underlying stock > Options > Analysis > Volatility Analysis

2. Indicator Explained

What is Implied Volatility (IV)?

Implied Volatility (IV) is a metric that represents the options market's forecast of a stock's volatility over the next 30 days.

It's calculated by aggregating the IV of various options within the options chain to indicate the stock's Total IV.

This figure sheds light on expected price fluctuations that could happen for both the options chain and the underlying stock.

Keep in mind that IV constantly fluctuates because options prices are always changing, depending on how the market anticipates future price moves.

What is Historical Volatility (HV)?

Historical Volatility (HV) measures how much a stock's price has moved in the last 30 days.

A high HV means the price has varied widely, indicating more volatility.

A low HV indicates minor price changes, suggesting stability.

What is IV Rank?

Total IV Rank compares the current IV to the stock's IV range over the past year, scoring it from 0 to 100.

A rank of 0 means the IV is at its lowest for the year, and 100 is the highest.

To calculate IV Rank:

IV Rank = (Current IV - 1 Year IV Low) / (1 Year IV High - 1 Year IV Low)*100

For instance, if a stock's IV was between 30 and 60 last year and is 45 now, its IV Rank would be 50.

What is IV Percentile?

IV Percentile measures how often the current IV has been exceeded in the past year.

It's calculated by counting number of the days over the last year when the IV was below the current level, then dividing by the total number of trading days.

IV Pctl = Number of Days with Lower Than Current IV / Number of Trading Days

For example, an 80% IV Percentile means the current IV is higher than 80% of the days in the past year, indicating high volatility now.

3. Example

From the chart below, we can infer the following information about XYZ stock:

HV = 40.50%. This tells us that over the past 30 days, the price of XYZ stock has varied by 40.50% from its average.

IV = 32.50%. At first glance, this number is lower than HV, which might imply that the expected future volatility is less than what was experienced historically.

This could lead one to believe the stock's IV is currently low.

However, when we consider IV Rank and IV Percentile:

IV Rank = 60. This indicates that the current IV is higher than 60% of its values over the past year, placing it in the upper middle range.

Despite the IV being lower than HV, this rank shows that the IV is relatively high based on its own historical range.

IV Percentile = 78.50%. This figure suggests that the current IV is higher than what was observed on 78.50% of the days in the past year.

confirming that the current volatility is relatively high.

As we can see, it's important to analyze these indicators together to make more informed trading decisions.

Keep in mind that implied volatility values, IV Rankings, and IV Percentiles are theoretical estimates, and the actual market conditions may not always align with the theoretical information shown.

Therefore, traders should exercise caution and use multiple sources of information when making investment decisions.

There is no guarantee or assurance that the use of any tools or data provided on the moomoo app will result in investment success or reduce investment risk.

4. Case Study

Next, we will demonstrate how to use this tool with several examples.

Scenario 1

When company XYZ is about to release its earnings report and its IV and IV Rank are both climbing.

it could suggest that traders anticipate high volatility due to the uncertainty surrounding the earnings outcome.

This anticipation could drive up options prices, making them more expensive.

After the earnings news hits, IV often plummets, which can slash the value of options (known as "IV crush").

Buying options before earnings can be risky because of this sudden fall.

IV Rank and IV Percentile can help us decide if IV is unusually high.

It's also important to look at what the earnings might bring and weigh that against the IV landscape.

This helps us choose a trading strategy that makes more sense.

Scenario 2

Just because stock XYZ has a higher IV doesn't mean its options are always more costly.

Each stock has its own volatility pattern—some are rollercoasters, others more like a calm sea.

So we can't directly compare the Total IV of two distinct stocks.

It's more useful to understand where XYZ's IV stands currently. That's where IV Rank and IV Percentile come in.

They help us gauge if a stock's options appear to be priced favorably or if their movements are more predictable.

Additionally, by using the Rankings feature, we can spot stocks with unusual IV levels, potentially uncovering trading opportunities.

Scenario 3

Option traders can use volatility as a part of their overall research to help to guide their strategy.

High IV percentile or rank suggests costly premiums, potentially opening the door for short strategies such as selling vertical spreads, covered calls, or cash-secured puts.

Conversely, a low IV percentile or rank points to relatively cheaper premiums, potentially favoring long strategies like calendar or long vertical spreads.

That's what today's lesson is all about. For more insights and regular updates, make sure to follow [Moo Options Explorer]!