Implied Volatility and IV Rank: How to Read Market Expectations
One of the most powerful tools in options trading and stock analysis is Implied Volatility (IV). While price shows us where the market is today, IV tells us what the market expects tomorrow. Let’s break down what IV means, how IV Rank works, and why these concepts matter for traders and investors.
What Is Implied Volatility?
Implied Volatility is the market’s estimate of how much a stock could move in the future. It is not a forecast of direction (up or down), but of magnitude. IV is calculated from option prices using models like Black–Scholes. When options are expensive, IV is high because the market expects turbulence; when options are cheap, IV is low because the market expects calm.
Reading the Numbers
- IV = 20–40% → Low volatility. Stable companies (Coca-Cola, J&J) usually trade here.
- IV = 60–100% → Elevated volatility. Mid-cap or growth names, often before earnings.
- IV = 100–200%+ → Extreme volatility. Small-caps or biotech stocks before FDA/special events. Options are very expensive here.
For example, GoPro recently had IV around 75%, which suggests a meaningful move is expected. In contrast, Opendoor (OPEN) showed IV over 180% — a sign of extremely high uncertainty after a fourfold price rally.
What Is IV Rank?
IV Rank puts today’s IV in context. It compares the current IV to its range over the past 52 weeks:
- IV Rank = 0% → Current IV is at the yearly minimum (cheap options, market calm).
- IV Rank = 50% → Current IV is in the middle of the yearly range.
- IV Rank = 100% → Current IV is at the yearly maximum (expensive options, market bracing for impact).
For example, an IV of 60% may look high, but if its historical range was 40–120%, the IV Rank would only be 25%. That tells us options are not particularly expensive relative to the past year.
How Traders Use IV and IV Rank
– Low IV + Bullish flow → Early smart money entry, before the crowd.
– High IV + Bullish flow → Everyone expects a move; often higher risk of “buy the rumor, sell the news.”
– Watching IV Rank helps spot whether options are cheap or expensive relative to history.
Key Takeaway
Implied Volatility is the market’s “fear and excitement gauge.” It tells you how strong a move might be, while IV Rank shows if today’s expectations are unusual compared to the past. Together, they help investors decide whether the market is calm, preparing for turbulence, or already in a storm.