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Implied Volatility Suite

When trading options, the Implied Volatility (IV) is very important. It is used to explain if an option is overpriced or under-priced. Often, options are over/under-priced for a good reason (earnings, or pending acquisition, etc.). Still, there are many cases where the divergence of IV allows us to increase our edge and find more profitable trades.

IV is also essential as it is mean-reverting - meaning that after a high value, you can expect a lower value and vise versa: after a low value, you can expect an increase in IV. This makes IV easier to predict compared to prices. You can see here an example of research we did: (Implied Volatility Rank in our blog)

In Samurai, we have several tools to help you find trades with favorable IV. Here is a short description of each of them:

IV Rank:

IV rank (we use percentile) is a measure between 0 to 100 that expresses how high the current IV value compared to its values in the past year. When the value is high (for example, above 80), you can expect a decrease in IV values and vise versa. You can see more here:

Research in the blog
IV rank vs Future IV change backtest (Oct 2020) - Blog
Data about the column in Knowledgebase: KB

(Note: Although we are calling the column IV rank - the calculation is actually percentile, as we believe it is more accurate. Read here about the difference between IV Rank and IV Percentile).

IV - RV filters:

RV/HV is the Real Volatility or Historical Volatility of the asset in the past month. When we compare the IV and the RV, we can see assets that the future volatility (as implied by the market) is above or below the real volatility in the past. This gives us another way to measure Over/under-priced options.
The data points in this category are:

IV - RV: This is the absolute value. A positive value (>0) means that IV is higher than the RV (options are expensive compared to the past), and a negative value (<0) means that the RV is higher than the IV and options are cheaper when compared to the past volatility.
IV - RV rank: A percentile that compares the IV-RV to itself over the last year. This is a value between 0-100, and it is mean-reverting. Meaning after a high value, you can expect a lower value and vise versa.
RV Rank: A percentile of the RV itself over the past year. The RV is calculated as the real volatility over the past month. It is used to indicate if the recent historical volatility is high compared to the previous year. It is mean-reverting as well. Read the research on our blog: Predicting RV change.

Volatility score:

This is an average of IV rank and IV-RV rank. It is a more 'smooth' metric to find options that are overpriced (high volatility score) or underpriced (low volatility score).

IV - RV graph:

This is part of the details page and allows you to see the IV and RV values over the past year. This will help you get a better understanding of the volatility mechanics.

There are three elements you need to analyze when looking at this chart:

1. Where is the current IV/HV compared to the past year - is it high, is it low? This will help you get some idea about the percentile - research shows that if it is very high or low compared to the previous year, there is a higher probability of reverting to the mean.

2. What is the short-term trend - Are the HV&IV on an uptrend or downtrend (they will probably continue over the short term). If there is a spike, it increases the chance to revert. But if the change is gradual, it increases the opportunity to continue the trend.

3. Whether the IV is above or below the HV shows us the market expectation. If IV is above HV, the market expects an increase in volatility and vice versa. Compare the difference to the past to see if it's extreme (might mean revert) or reasonable.

Controlling the IV/HV chart

You can control the IV/HV parameters in the chart by clicking the gears icon.

Read more about the controls in our Details tab article.

Call IV + Put IV:

We also calculate the IV based on only call options and put options. This is a percentile measure for the past year and is mean-reverting. You can use them for a more fined-tune analysis of only the calls or the puts.

Skew

The IV in a chain is usually in a 'smile.'

https://en.wikipedia.org/wiki/Volatility_smile

The skews measure this divergence between options on that 'smile' and can be used to see bullish or bearish tendencies in the options.

Skew is calculated 25 deltas put minus 25 delta call, 30DTE.
Call skew is calculated 50 delta call - 25 delta call, 30DTE.
Put skew is calculated 25 delta put - 50 deltas put, 30DTE.

RV - Realized Volatility

The Realized Volatility (RV) - also sometimes referred to as Historical Volatility, is the past volatility of the Stock over the last 30 days. We allow you to scan according to RV and RV rank (percentile of the RV value over the previous year).

Please note that if you are interested in stock volatility, we also allow you to use: Beta, ATR, Bollinger bands, and standard deviations.

You can use these measures in our scanner, scenario for the entire market, analysis tab, and more to find the stocks according to your preference.

Optimal strikes, Greeks, Expected Value, Probability of expiring worthless, and more

Similarly to the way we calculate IV, we also incorporate the Black&Scholes model in other data points in our system. Our goal is to help you find the optimal strikes for your options trade. So even if you don't use the IV data points, rest assure we worked hard to help you find the maximum edge in your trade.

Backtesting IV rank vs future IV change - Blog
Backtesting IV vs RV - Blog
You can read more about the data points here: Data points in Samurai KB
And about the unique features here: Samurai's Unique Features in KB
Expected Value: Article in KB
Probabilities: Article in KB

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