Build implied volatility surface for tracked equities; identify IV rank vs 1-year history
Answers where each stock's implied volatility sits within its own past year right now. For each tracked equity it reads an implied-volatility surface and pulls the IV rank versus the trailing year along with the options skew. It places each stock in a tier: high IV rank (70 or above), mid IV rank (between 30 and 70) or low IV rank (30 or below), where the rank is the position of current implied volatility between its own 52-week low (0) and high (100), not a percentile of days; a stock without a rank belongs to no tier. For high IV rank names it states that implied volatility sits in the highest 30% of that range. A tier is a position in the stock's own range, not a valuation of its options. Use it as context on how a stock's option pricing compares to its own recent history; it matters because IV rank informs the relative cost of buying or selling premium.
IV rank and IV percentile - two similar-sounding measures that are not the same, and the difference decides what a reading means.
IMPLIED VOLATILITY is the volatility input that makes a pricing model return the option's observed market price. It is a quoted price expressed in volatility units, which is what makes options comparable across strikes, expiries and underlyings.
IV RANK positions today's IV within the trailing year's RANGE: (current - 52-week low) / (52-week high - 52-week low), as a percentage. IV PERCENTILE instead asks what FRACTION OF DAYS in the past year IV was below today's. The two can differ materially, and the reason is instructive: rank depends only on three numbers - today, the trailing maximum and the minimum - so a single extreme day, perhaps one panic, sets the top of the range and depresses every subsequent rank for a year. Percentile uses the empirical distribution and is far less sensitive to the MAGNITUDE of one extreme observation, though not immune to sample composition. Knowing which one you are reading is the difference between a meaningful and a misleading number.
WHY THE TIERS SAY HIGH AND LOW IV RANK, NOT 'RICH' AND 'CHEAP'. The tiers are high IV rank (70 or above), mid (between 30 and 70) and low (30 or below), and each compares a name's implied volatility to that same name's OWN recent history, which is the right comparison for the question asked. A tier is a position in a range, not a valuation; rich and cheap read as a valuation, so the analysis does not use them. Note two things it does not do. It does not compare against the stock's REALISED volatility, which is the comparison that would say whether options are expensive relative to the movement actually delivered. And it does not adjust for whether current volatility is high for a REASON - a company facing a genuine binary outcome has high IV that is correctly priced, and a percentile is blind to that.
THE VARIANCE RISK PREMIUM, which colours everything. Many equity-option samples find option-implied VARIANCE above expected or subsequently realised variance on average - the variance risk premium, documented by Bakshi and Kapadia (2003) through delta-hedged option returns and by Carr and Wu (2009) through model-free variance claims, and read as compensation to sellers for bearing volatility risk. Note that authors use opposite sign conventions for it, so check which is meant before comparing figures. The upshot: options are on average somewhat 'rich' relative to realised outcomes as a baseline condition. A high IV rank is a statement about this name against its own year, not a claim that the option is mispriced.
MEAN REVERSION IN VOLATILITY is what makes rank useful at all. Volatility is one of the more mean-reverting quantities in finance, which is why 'high relative to its own history' carries information that 'high price' would not. Keep two properties apart, because they are routinely conflated: volatility CLUSTERS - it is persistent at short horizons, so high readings tend to stay high for a while - and it MEAN-REVERTS at longer horizons, drifting back toward a long-run level. Clustering is not caused by mean reversion; they describe different timescales.
WHAT A HIGH IV RANK DOES NOT MEAN FOR OPTION SELLERS. Covered calls and collars, two common structures, involve SELLING an option, so both collect more premium when implied volatility is elevated. That is not the same as being more attractive: high implied volatility may be correctly compensating high expected realised variance or a genuine binary event, in which case the extra premium is a fair price for extra risk rather than an edge. Understand the trade-off precisely: a covered call exchanges upside beyond the strike for premium received, and a collar funds a protective put by selling that upside. Neither removes risk; both reshape the payoff.
The 70 and 30 thresholds are our own convention.
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