Understanding IV Rank and IV Percentile in Thinkorswim Using Thinkorswim script

Introduction

Welcome to our comprehensive guide on IV Rank and IV Percentile! If you’re an options trader looking to make more informed decisions, understanding these two metrics is crucial. In this blog, we’ll explore what IV Rank and IV Percentile are, how to implement them in Thinkorswim using Thinkorswim script, and how to interpret these metrics to enhance your trading strategies.

What Are IV Rank and IV Percentile?

IV Rank and IV Percentile are metrics used to measure the relative level of implied volatility (IV) for an underlying asset. They help traders understand whether the current IV is high or low compared to its historical levels.

• IV Rank: Measures where the current IV stands relative to its range over a specific period (usually one year).

  It is calculated as:

  
  

  IV Rank = [(Current IV - Lowest IV) / (Highest IV - Lowest IV)] x 100

  
  

  An IV Rank of 80% means the current IV is higher than 80% of the IV values over the past year.

  
  

• IV Percentile: Indicates the percentage of days over the past year that the IV was lower than the current IV. For example, an IV Percentile of 80% means that IV has been lower than the current level 80% of the time.

  
  

Implementing IV Rank and IV Percentile in Thinkorswim Using Thinkorswim script

To add IV Rank and IV Percentile to your Thinkorswim charts, follow these steps:

# IV Rank and IV Percentile
declare lower;

input length = 252; # Number of days to look back (1 year)
def iv = imp_volatility();

# Calculate IV Rank
def ivHigh = Highest(iv, length);
def ivLow = Lowest(iv, length);
def ivRank = if (ivHigh - ivLow) != 0 then ((iv - ivLow) / (ivHigh - ivLow)) * 100 else 0;

# Calculate IV Percentile
def count = fold i = 0 to length with p = 0 do p + (if GetValue(iv, i) < iv then 1 else 0);
def ivPercentile = (count / length) * 100;

# Plot IV Rank and IV Percentile
plot IVRank = ivRank;
plot IVPercentile = ivPercentile;

IVRank.SetDefaultColor(Color.CYAN);
IVPercentile.SetDefaultColor(Color.MAGENTA);

Steps to Add the Script

1. Open Thinkorswim and go to the Charts tab.

2. Click on the Studies button (top right) and select Edit Studies.

3. In the new window, click on Create (bottom left).

4. Delete any existing code in the editor and paste the script above.

5. Name the study (e.g., “IV Rank and IV Percentile”) and click OK.

6. Apply the study to your chart by clicking Apply and then OK.

Interpreting IV Rank and IV Percentile

IV Rank Interpretation

• High IV Rank (Above 50%): Indicates that the current IV is relatively high compared to its historical range. This suggests that the market expects significant price movement in the near future. High IV Rank can be an opportunity for options sellers, as higher IV generally means higher premiums.

• Low IV Rank (Below 50%): Indicates that the current IV is relatively low compared to its historical range. This suggests that the market expects less price movement. Low IV Rank can be an opportunity for options buyers, as lower IV generally means lower premiums.

• IV Rank Near 100%: The current IV is at or near its highest level over the look-back period. This is often seen in times of market stress or significant events.

• IV Rank Near 0%: The current IV is at or near its lowest level over the look-back period. This is often seen in stable market conditions.

  
  

IV Percentile Interpretation

• High IV Percentile (Above 50%): Indicates that the current IV is higher than it has been for most of the past year. This can be a signal that the market is expecting higher volatility.

• Low IV Percentile (Below 50%): Indicates that the current IV is lower than it has been for most of the past year. This can be a signal that the market is expecting lower volatility.

• IV Percentile Near 100%: The current IV is higher than almost all the IV values over the past year.

• IV Percentile Near 0%: The current IV is lower than almost all the IV values over the past year.

  
  

Practical Use Cases

1. Options Selling: When IV Rank and IV Percentile are high, selling options (e.g., covered calls, cash-secured puts) can be advantageous because the premiums are higher.

2. Options Buying: When IV Rank and IV Percentile are low, buying options (e.g., long calls, long puts) can be more attractive because the premiums are lower.

3. Hedging: High IV Rank and IV Percentile can indicate a good time to hedge positions if you expect increased volatility. Conversely, low IV Rank and IV Percentile might suggest a period of stability where less hedging is needed.

Conclusion

Understanding and utilizing IV Rank and IV Percentile can significantly enhance your options trading strategies. By implementing these metrics in Thinkorswim using Thinkorswim script, you can make more informed decisions and optimize your trading outcomes.

Call to Action

Ready to start using IV Rank and IV Percentile in your trading? Open your Thinkorswim platform, add the Thinkorswim script, and begin analyzing the volatility environment of your favorite stocks today. Share your experiences and questions in the comments below!

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