Implied Volatility & IV Rank
The market's forecast, and whether it's cheap
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Implied volatility is the market’s forecast of how wild a stock will get. IV Rank tells you whether that forecast is a bargain or a rip-off.
Last lesson, Vega reacted to a number called “expected volatility.” Time to meet that number properly. Implied volatility — IV for short — is the market’s guess, baked right into option prices, about how much a stock will swing going forward.
The key word is going forward. IV isn’t a record of what already happened — that’s historical, or realized, volatility. IV is a crowd-sourced forecast of future turbulence, quoted as an annual percentage. It’s the market placing a bet on how wild the ride gets.
Implied volatility does NOT describe how much a stock already moved — that’s realized volatility. IV looks forward, pulled straight out of what people are willing to pay for options right now.
High IV vs. low IV
IV directly sets how pricey options are, so it changes your whole game plan depending on which side of the trade you’re on:
High IV means options are expensive — great for sellers collecting fat premium. Low IV means options are cheap — great for buyers who want more upside for less money. Match your strategy to the weather: sell the storm, buy the calm.
High IV: rich premium to sell. Low IV: bargain options to buy. The number picks your side.
The problem with a raw IV number
Quick question: is 40% IV high or low? …You can’t tell. And that’s the whole problem. A sleepy utility stock might never touch 40% — that would be a screaming storm. A hot biotech treats 40% as a lazy Tuesday. A raw IV number, all by itself, means almost nothing.
You need context: where does today’s IV sit for this specific stock? That’s exactly what IV Rank delivers. It maps the current IV onto its own 52-week range — from its lowest level to its highest — and hands you back a single score from 0 to 100.
IV Rank of 90 means current IV is near the top of its yearly range — options are relatively expensive, often a green light for premium sellers. A low IV Rank means IV is near its floor — options are relatively cheap for buyers.
So the workflow is simple. Suspect a stock has cheap options? First, look up its current implied volatility. Second, compare it to the past year with IV Rank. Third, if IV Rank comes back low, you’ve confirmed the options really are cheap for this stock — not just cheap-sounding in isolation.
IV tells you the forecast. IV Rank tells you whether that forecast is unusually cheap or dear. Never judge one without the other — a number without context is just noise.
Now you can read the market’s forecast and judge whether it’s a bargain. But forecasts can collapse in an instant — and there’s one predictable moment every quarter when they do exactly that, trapping unwary buyers. Next: IV Crush & earnings. 💥