Our trade recommendation services provide signals based on various analytics including Implied Volatility. To be a successful trader, you have to study the IV Chart and IV movements which can be found in our Virtual Trading tool.
IV Rank, or Implied Volatility Rank, is calculated by dividing the difference of today’s IV value and the lowest IV value in the past 52 weeks by the difference of the highest IV value and the lowest IV value in the past 52 weeks.
IV Rank = (Current IV – LowIV)/(HighIV – Low IV).
In this example, it can be calculated as (11-8)/(20-8)=25%.
One of our most common questions we are asked at Tradespoon is, “Do you buy Debit Call Spreads or Credit Put Spreads?”
The method we follow is quite simple- when the IV Rank is low (less than 50%), then you buy Options. When the IV Rank is high (greater than 50%), then you sell options. For this, we constantly study the Implied Volatility of the underlying asset and apply the same technique regardless of whether we are doing Iron Condor, Credit Call Spreads, Credit Put Spreads or something else.
Look at the 52-week chart of Implied Volatility. As a rule of thumb, buy when the IV Rank is low and sell when the IV Rank is high. In Figure 23, IV Rank is depicted by the green line, the troughs of the mountains indicate a low IV Rank and the peaks indicate a high IV Rank. This is what determines whether you are doing a Credit Strategy or a Debit Strategy.
Always keep in mind the concept of Probability of Success versus Risk. High Probability of Success means that you are taking high risk and hence the Return on Capital will be low. This is a good strategy to execute when the IV Rank is high. Low Probability of Success means that the risk involved is low and hence the Return on Capital will be high. This is best done when the options are cheap and the Implied Volatility is low. As you get more comfortable with Return on Capital, you will start structuring your trades with high Probability of Success and high Implied Volatility.