Many traders get confused with the concept of Implied Volatility Rank (IVR) and Implied Volatility Percentile (IVP) and use them interchangeably.
IV Percentile is the percentage number of days over the past one year the IVs are under the current IV. In other words, an IV percentile of 60% means implied volatility traded below the current level for 60% of the days in the past 52-week.
So, it means that implied volatility at the current price is higher than usual.
IV Rank – Measurement of current IV from 0 to 100 range based on its yearly high and low IV.
IV Percentile – Percentage of days over the past year that were below the current IV.
Now, when the implied volatility of a stock spiked to 40% which is way beyond its high of the historical IV. The IV rank will shoot to 100% But, what would happen if it stayed at 40% for an extended period of time?
Well, IV rank would be pinned at 100%, telling you that the 40% IV is the highest implied volatility the stock has seen over the past year. However, IV percentile would fall, as the 40% IV becomes more “normal.”
So, when a market’s implied volatility personality changes, IV percentile will be the first to let you know. IV percentile doesn’t suffer from the flaw of IV rank after an abnormally large increase in implied volatility.
IV percentile takes account of the recent changes, tells you more of the story and also serves as a “mean-reversion” indicator.
Although IV percentile is superior to IV rank, what is more important is the Implied Volatility itself. Different traders have their own preference.