Implied Volatility Percentile (IVP)
IV Percentile (IVP) measures on how many trading days in the past year implied volatility was lower than today – the key metric for judging whether options premiums are currently elevated or cheap.
Management Summary
- IVP measures frequency and indicates on how many days of the past year (252 trading days) implied volatility (IV) was lower than it is today.
- The advantage: It is immune to occasional market crashes or short squeezes (outliers), as extreme peaks do not artificially distort the statistics.
- How to use: A high IVP (e.g. >50) indicates statistically expensive options (strategy: sell options), while a low IVP (e.g. <30) indicates cheap options (strategy: buy options).
Examples
High IVP: Stock XYZ currently has an implied volatility of 45%. A look at historical data shows that on 227 of the 252 trading days last year, the IV was below 45%. The IVP is therefore 90% ($\frac{227}{252} \times 100$).
$\rightarrow$ Trading Implication: Options are statistically expensive. This suggests a good time to sell options.
Outlier: Three months ago, the stock XYZ experienced an extreme flash crash, during which the IV skyrocketed to 80% for a few hours. Today, there is slight turbulence and the IV is rising to 28%. Since the index has almost always traded at a calm IV of 15% for the rest of the year, the IV was lower than today’s 28% on 240 days. The IVP is therefore 95% ($\frac{240}{252} \times 100$).
$\rightarrow$ Trading Implication: Although the raw IV of 28% is far from the annual high (80%) and thus appears “low,” the IVP of 95% indicates that options are currently extremely expensive from a historical perspective. Signal: Sell options. The one-time 80% outlier is perfectly canceled out by the IVP.
Definition
$$\text{IVP} = \frac{\text{Number of days in the period with (IV} < \text{IV}_{\text{current}}\text{)}}{\text{Total number of trading days in the period}} \times 100$$
An IVP of 75 states: The current IV is higher than on 75% of the days in the past year.
Practical relevance
- The IVP protects traders from misinterpretations following extreme market shocks (such as a flash crash or short squeeze).
- The problem with other metrics: If the IV shoots up from 20% to 100% in a single day due to panic and immediately drops back down the next day, that 100% distorts the entire linear scale for the rest of the year in metrics that only measure start and end points.
- The IVP’s solution: For the IV percentile, this extreme panic day is statistically just one day out of 252. It carries little weight in the frequency count. The IVP therefore provides an undistorted picture of real, everyday volatility even after massive market disruptions.
- The IVP serves as the primary filter for selecting an options strategy.
- High IVP (e.g., > 50 to 100) $\rightarrow$ Sell options (short volatility)
- Market conditions: Options are statistically expensive. Implied volatility is higher than for most of the year. The probability of a return to the mean (mean reversion) is high.
- Popular strategies: Short puts, covered calls, iron condors, strangles, credit spreads.
- Low IVP (e.g., 0 to < 30) $\rightarrow$ Buy options (long volatility)
- Market conditions: Options are statistically cheap. The risk of loss due to falling volatility (volatility crush) is minimal.
- Popular strategies: Long calls/puts, debit spreads, calendar spreads.
- High IVP (e.g., > 50 to 100) $\rightarrow$ Sell options (short volatility)
This article is for educational and informational purposes only. It does not constitute investment advice or a recommendation to buy or sell any financial instrument. All trading decisions are made at your own risk.