How to Trade Options

Checklist for Trading Volatility: IV Rank and Percentile

In this lesson, you’ll learn how to build a profitable options trading business by mastering the essential rules for analyzing volatility. We focus on teaching you when to be a buyer versus a seller of options based on volatility levels, and how to use specific screening tools to make informed trading decisions.

Understanding implied volatility is crucial for options trading success. You need to distinguish between directional strategies (which benefit from price movements) and market neutral strategies (which profit from volatility direction regardless of price movement). We explain that when implied volatility is high, it’s better to be option sellers benefiting from premium and positive theta while being short gamma. Conversely, when implied volatility is low, you should consider being option buyers with long gamma positioning, though theta works against you.

To determine if volatility is relatively high or low, you can’t just look at raw implied volatility numbers. We introduce two critical screening tools available on barchart.com and in our morning reports: IV Rank and IV Percentile. IV Rank represents the average at-the-money implied volatility of the last year in relation to the high and low of that period, calculated on a scale of 1 to 100%. An IV Rank of 100% means current implied volatility is at its highest level in the last year, while a value close to zero indicates it’s near the low. IV Percentile calculates the percentage of days in the last year when implied volatility was less than the present value—for example, an IV Percentile of 70% means that on 70% of days in the last year, implied volatility was lower than today.

You can create a practical checklist using IV Rank levels to guide your strategy selection. For underlyings with IV Rank between 70 and 100, implied volatility is very high, making option selling strategies more favorable—you can use higher-risk strategies like Stratos, Strangos, and Butterflies. For IV Rank between 50 and 70, option selling still offers better odds, but you should limit risk with less aggressive strategies like call and put spreads or iron condors. When IV Rank is below 50, implied volatility is low, so you should avoid or limit selling options and instead focus on buying options, perhaps using spreads to limit risk.

You can use IV Rank and IV Percentile in conjunction with our Q models for confirmation. We recommend using JAX to confirm the direction of volatility—when selling options, you want JAX going higher, with accumulation of JAX above the eyeball level and more sticky strikes from the top of the screen in the red box, confirming that investors are becoming more bullish and volatility is coming down. The option matrix is another excellent tool for understanding how investors position themselves at different expirations, allowing you to see how Gamma builds up across different expiration dates.

Video Chapters

  1. 00:00 – Introduction to operational options trading
  2. 00:31 – Directional vs market neutral strategies
  3. 01:52 – When to buy vs sell options based on volatility
  4. 02:25 – Introduction to IV Rank and IV Percentile on barchart.com
  5. 03:11 – Understanding IV Rank calculation and interpretation
  6. 03:32 – Understanding IV Percentile calculation
  7. 04:01 – Using IV Rank levels for strategy selection
  8. 04:57 – Combining IV Rank with Q models and JAX

Key Takeaways

  1. IV Rank ranges from 1 to 100% and shows where current implied volatility sits relative to the last year’s high and low, helping you compare different underlyings
  2. When IV Rank is above 70, focus on option selling strategies; when below 50, focus on option buying strategies
  3. Use JAX from the Q models to confirm volatility direction—rising JAX with accumulation above the eyeball level indicates bullish positioning and declining volatility
  4. The option matrix helps you understand how Gamma builds across different expirations for better timing of your strategies
Video Transcription

[00:00:00.34] - Speaker 1
At this point, we are ready to enter the operational part. We have the theoretical foundations and we know how to use the Q models. We have the theoretical foundations and we know how to use the Q models. It's time to put everything into practice. Let's go.

[00:00:13.55] - Speaker 1
If you want to build a profitable trading business using options, you need to keep in mind some fundamental rules. We talked about Greeks in the initial part of the course. The fundamental theme here is recurrent. You need to know how to read and use volatility. It is necessary to understand the volatility of the asset you trade.

[00:00:31.26] - Speaker 1
This is essential, especially if you use options for trading. Once we have identified the volatility of our asset, we need to understand what type of strategy we want to use. This depends on several factors and here are some questions for you. Do we want to be buyers or sellers of volatility? Do we have a directional view on the asset?

[00:00:51.02] - Speaker 1
And are we investing to benefit from the volatility or direction of the underlying asset? A good option investor tends to use spreads because they help us manage our risk. And as an investor, before making a profit, we must look at the capital protection. You can invest by going long or short of an option, but is riskier and tends to be more expensive. For this reason, even if we have a directional view, we can use spreads.

[00:01:13.44] - Speaker 1
It is necessary to distinguish between directional strategies and market neutral strategies. Here you can see some of the directional strategies that help us take advantage of a price increase. We will study them in detail later. Then we have market neutral strategies. In this case, it doesn't matter if the underlying moves in either direction.

[00:01:31.08] - Speaker 1
What matters to us is the direction of volatility. Here are some of the strategies and again we will look at them later in details. Our Q models are one of the best ways to understand how volatility moves in the short term. As an option trader, to be successful, you need to be in the right direction of volatility. Based on your strategy, you need to know when to be a buyer and when to be a seller of options.

[00:01:52.13] - Speaker 1
In general, you can use the following two. We know that if implied volatility is high, it is better to be option sellers. We are more likely to be successful in these cases. Therefore, we are short options. We benefit from the premium by being sellers and theta is on our side.

[00:02:07.49] - Speaker 1
In this case, we are short gamma. On the other hand, if implied volatility is low, we can be option buyers. In this case, we are long options. We want an increase in volatility and theta is negative for us. Here we are Long gamma selling options in many cases gives us a better chance of winning than buying options.

[00:02:25.46] - Speaker 1
So when we look at underlyings, how do we know if volatility is relatively high or low? It is not enough just to look at the data on implied volatility. We also have to look at the relationship to its history. Here we can see an example from barchart.com Once on the site you can go on the Options menu and IV Rank IV percentile. You will also find this data in our reports in the morning specifically for the SPX index.

[00:02:49.12] - Speaker 1
Here we have a screener done on these two values IV Rank and IV Percentile. Here we can rank for implied volatility and we can see that both bank of America, Microsoft and Apple have similar implied volatility around 35 or 36%. So it might appear that these three stocks are on the same level of volatility. It's actually not like that. We need to therefore analyze how implied volatility has moved historically.

[00:03:11.31] - Speaker 1
To do this we can then introduce the two tools we use. The first one is IV Rank. IV Rank represents the average at the money implied volatility of the last year in relation to the high and low of the period. It is calculated on a scale of 1 to 100%. An IV rank of 100% means that the current implied volatility is at its highest level in the last year.

[00:03:32.01] - Speaker 1
An IV Rank close to zero represents an implied volatility that is close to the low of the last year. Then we have IV percentile. IV Percentile calculates the percentage of days in the last year in which the implied volatility was less than the present value. For example, an IV percentile of 70% means that on 70% of the days in the last year we had lower implied volatility than today. IV Rank therefore allows us to make a comparison between different stocks and ETFs to understand which ones can be the best for buying or selling options.

[00:04:01.25] - Speaker 1
But how can we use this data to select the right option strategies to implement? Now let's try to understand how to use the IV Rank based on the levels. This can be really helpful and it should be part of your checklist. Lets start from underlyings that are between 70 and 100 IV rank. This means that implied volatility is very high and being option sellers would give us more probability of success on these underlyings.

[00:04:24.35] - Speaker 1
We can use selling strategies with higher risk, for example Stratos, Strangos Butterflies. We can then look at underlyings that have an iv rank between 50 and 70 option selling strategy still gives us better odds of winning, but we must limit our risk so less aggressive strategies like call and put spreads or iron condors can make sense. Finally, we can look at underlyings that are below 50 IV rank with low implied volatility. We should avoid or limit selling options. In these cases we can focus on buying options, perhaps limiting our risk through spreads.

[00:04:57.02] - Speaker 1
IV rank and IV percentile in general can be used in conjunction with our Q models. For example, we like to use JAX to confirm the direction of volatility. If we sell options, we want volatility to start going down. Jax going higher is good for our strategy. We want to see the JAX rising on this screen to confirm that the JAX is increasing.

[00:05:16.42] - Speaker 1
We want to see an accumulation of JAX above the eyeball level. We want to see more sticky strikes from the top of the screen in the red box. This confirms that investors are starting to become more bullish on positioning and this brings volatility down. The previous chart helps us to understand the market positioning by strikes. The option matrix is an excellent tool to understand how investors are positioning themselves at different expirations in the future.

[00:05:40.46] - Speaker 1
Again, going back to our example of selling options, we want to see how Gamma is building up across the different expiration on the option matrix. At this point we can move on to the next section where we look at the different strategies from the simplest to the most complex.