Implied Volatility
Normal Volatility
| Step | Excel Formula | Meaning |
|---|---|---|
| Daily return | =(B2/B1)-1 OR =LN(B2/B1) | Price change per day |
| Daily STD DEV | =STDEV.S(C2:Cn) | Daily volatility |
| Annualized | =stdev * SQRT(252) | Annualized volatility |
| Monthly | =stdev * SQRT(22) | Monthly volatility |
| 💡 Tips for accuracy |
- Use clean, continuous price data (no missing days).
- Log returns are more stable for long periods.
- If you want monthly volatility, replace 252 with 22 trading days.
Implied Volatility
When writing covered calls and selling cash-secured puts, the implied volatility of the underlying securities is directly related to the premiums we receive and also measures the risk we are taking with our option-selling trades.
Recently, there has been interest in 2 IV metrics: IV Rank and IV Percentile. These give an historical perspective of the IV itself_._
Definitions Implied volatility: This is a forecast of the underlying stock’s volatility as implied by the option’s price in the marketplace. It is generally based on a 1-year time-frame and 1 standard deviation (accurate 67% of the time).
IV Rank: Measures IV in relationship to its 1-year high and low. If the current IV is 20% and the 1-year range is 10% – 40%, the IV Rank is 33%. The formula is:
[100 x (current IV – 1-year low)/(1-year high – 1-year low)].
In this hypothetical: [100 x (20 -10) (40 – 10)] = 33%
IV Percentile: The percentage of days the IV is below current IV in the past 1-year. It does not factor in yearly high and low. If the current IV is 30% and 200 of the past 252 trading days the stock’s IV was below 30%, the IV Percentile is 79.4%. The formula is:
(# days IV is below current level/252).
In this hypothetical: (200/252) = 79.4%
IV Rank and Percentile Data can be found in most broker research platforms
IV Rank and Percentile Stats at Schwab
General applications Some option traders will use IV Rank and Percentile to determine which strategies to use. For example, if a stock has an especially high IV Rank or Percentile, a strategy may be selected to take advantage of the mean reversion concept that suggests a return to average. The same holds true for a low rank or percentile.
