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.
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.
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We use one year IVR.
IV Percentile tells the percentage of days over the past year, that was below the current IV.
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.
IV 30 (or current IV) refers to the way the IV value is obtained. For IV30 you use the ATM price for the options at 30 DTE (Thus the name IV30)*. You are trying to measure the "expected" or implied volatility from the traders as reflected by the options' price over the next 30 days.
That IV value is then calculated and stored for each trading day. The ranking (IVR) is obtained by ranking the current value within the values range for the whole year ( 252 trading days on a calendar year).
* since you don't always have expirations in 30 days, the formula actually uses the ponderated average of two expirations close to 30, but that is for another day.
