Why IV Rank is garbage. David Jaffee with BestStockStrategy.com and in this
video we are going to learn why you should not use implied volatility rank and IV Rank. IVR is implied
volatility rank it has been made popular by tastyworks / tastytrade and Tom Sosnoff and Tony
Battista. What IV Rank does is it measures the high and the low of the implied
volatility of a specific underlying over the past 12 months and then states it as
a percentage relative to his highs and lows again just to be clear what IV Rank
does is it looks at the current implied volatility and then it compares it to
the high of the implied volatility and the low of the implied volatility and
then it spits out a percentage of where the current implied volatility ranks
relative to the high volatility and the low implied volatility of a specific
underlying over the past year so you would think that if a specific
underlying currently has relatively high implied volatility rank which would be
something over about 50 or 60% then it would be a good opportunity for you to
sell premium in that security because the implied volatility of that specific
security is high relative to what it normally is the problem with implied
volatility rank is that it is subject to extremes so right now it is December
23rd 2019 just about a year ago on December 24th 2018 they the S&P 500 was
down around 80 points and then it had about a hundred twenty point reversal
intraday the reason why this is significant is that right now at this
specific moment the December 24th reversal and the high point for the
volatility is still factoring into the one year time period in the one year
look-back period what this means is that the extremes are factored into and
measured in the implied volatility rank rank equation and as a result the
current IV Ranks for all of the stocks in your watchlist
are in all likelihood artificially low when compared with where they will be in
just a few days once that December 24th 2018 day actually falls off an implied
volatility actually normalizes again the real problem with IVR is that it leaves
you subject to the extremes both on the high end and the low end so those people
who scan their watchlist for high IVR what they're doing is they're comparing
IV rank against a base number the high point where the ID are at that specific
moment is not necessarily representative of current market conditions and it's
probably not representative during normalized markets because when you look
back at December of 2018 that was a very high volatile environment where there
was substantial fear in the market place and I believe the sp500 lost close to
around 20% in just one month as a result you need to be extremely careful when
factoring in and using those high IV environments into your present day
situation and into the present day environment so those people who are
scanning their watchlist for high IVRS their IV ranks are artificially deflated
what tastyworks should do is they should look at the median implied
volatility and then they should compare that against the current volatility so
the equation what it would look like is you would have the current implied
volatility as the numerator then you would have the median implied volatility
for that specific underlying as the denominator that way when you use the
median as your denominator you are not having the outlier moves in implied
volatility factored into an influence your decision of whether you should make
a trade in the present moment so again you would look at the current imply
volatility as the numerator then as the denominator you would have the median
implied volatility over a specific time frame whether it be six months or 12
months that's fine and then the higher that number is the better so that would
be a much more useful indicator on whether a stock in your watchlist is
worthy of you trading it David Jaffee with beststockstrategy.com if you
have any questions leave a comment below I respond to everyone's comments