Implied volatility (IV)

Implied volatility is the level of future price movement that an option's current price implies, expressed as an annualized percentage. It's derived from the option's market price by working the options-pricing math backward. Given everything else about the contract (strike, time to expiry, interest rates), IV is the volatility assumption that makes the model price match what the option is actually trading for. Every option has its own IV, and it changes constantly as the option's price moves relative to the underlying stock.

Raw IV numbers aren't directly comparable across different stocks or across different points in the same stock's history, so IV rank and IV percentile translate a stock's current IV into where it sits relative to its own trailing range, typically the past year. An IV rank of 80 means today's IV is near the top of that stock's own 52-week range. An IV rank of 15 means it's running unusually low for that name. Reading IV this way, relative to the stock's own history, matters more than the raw percentage, since a 40% IV might be elevated for a stable large-cap and completely normal for a volatile small-cap.

High IV rank doesn't mean a stock is about to move. It means options are currently pricing in more movement than that stock has typically delivered over the past year, which is a statement about pricing, not a forecast. It also compresses a lot of nuance into one number. A name's IV can be elevated because of a single known event, like earnings, rather than a persistent regime change, and IV rank alone doesn't distinguish between those two very different situations. Read it alongside the reason IV is where it is, not as a standalone directional call.

Consider two stocks both currently showing 45% implied volatility. Stock A has traded between 30% and 90% IV over the past year, putting that 45% reading at an IV rank near 25, on the cheap side of its own range. Stock B has traded in a tight 40% to 50% band all year, putting the same 45% reading at an IV rank near 50, squarely in the middle of its normal range. Same raw IV, very different reads. Options in Stock A currently look relatively inexpensive against its own history, while Stock B's options are priced about where they usually sit.