Implied volatility and IV rank for sellers

Implied volatility

Implied volatility (IV) is the amount of movement an option's price assumes, stated as an annual percentage. Higher IV means more expensive options. Sellers collect it; buyers pay it.

Realized volatility is the movement that actually happens. The gap between the two, implied minus realized over the life of the trade, is the variance risk premium, and it is the main source of a put seller's edge.

IV rank and percentile

IV rank places today's IV within its range over the past year: 0 is the low of the year, 100 the high. IV percentile counts the share of days IV was lower than today. Both are popular entry filters on the theory that selling when options are relatively expensive pays more.

The theory has a catch. IV is high because the market expects movement, and it is often right.

What our data showed

In our paper book the premium sellers earned, IV minus realized volatility, ran about 8 to 12 volatility points from July to September and then went to zero in October. Monthly returns followed it, from roughly plus 0.8% to plus 1.1% a trade down to minus 0.4%.

Nothing measured at entry predicted it. IV relative to the last 20 days of realized movement had a correlation of minus 0.06 with the outcome, and the quarter of trades where options looked richest had the lowest win rate, 79% against 86% for the cheapest. Selling the expensive ones was adverse selection. A capital-year replay of IV-gated entries found the gates kept capital idle most of the time and earned less per year than selling every day, though they did reduce drawdown for a seller who held to expiry.

A thin premium is not a broken strategy

When returns fall, check whether the premium itself shrank before deciding the strategy stopped working. Our edge monitor makes that split: on its first read, a weekly baseline showed the premium falling from about 5.9 to 2.9 volatility points with returns still positive, which is a lean market, not decay. The guides on theta decay and on DTE cover the other inputs to what you collect.