Let's cut to the chase - whipsawing action in global equity markets has ripped the financial world's attention back toward "traditional" markets - stocks, futures, and derivatives.

While digital currencies were the surprise story of 2017, volatility has stolen the show in 2018. And it doesn't look like the roller-coaster ride will slow down anytime soon.

Given the relative chaos this year (as compared to 2017), you may be looking to identify additional analytical metrics that can help you identify the very best trading opportunities. The type of information that can add a second-or-third layer of analysis to your decision-making process.

If that is the case, a recent installment of The Ryan & Beef Show should be considered must-see TV. On this episode, Ryan and Beef introduce Realized Volatility Rank (RV Rank) and explain how it can be used in conjunction with Implied Volatility Rank (IV Rank).

As most are already aware, Implied Volatility Rank is a tastytrade metric that provides insight into the current levels of implied volatility in a given underlying as compared to the last 52 weeks of data.

Using an example, imagine that implied volatility in symbol XYZ is currently trading 45 and that over the last 52 weeks it has ranged between 30 and 50. In this case, implied volatility rank would currently be 50%. If implied volatility dropped to 30, then IV Rank would drop to 0%.

At tastytrade, we often look for opportunities to sell premium when IV Rank is above 50%, and look for opportunities to purchase premium when it's below 50%.

Now, let's shift the focus to realized volatility (aka actual volatility or historical volatility).

While implied volatility represents the current market price for volatility implied by options prices, realized volatility represents the actual observed volatility for a given underlying over a specified period of time in history.

Therefore, Realized Volatility Rank (RV Rank) reports how much an underlying is actually moving as compared to the last 52 weeks of data. So if the range for realized volatility in stock ABC was between 20 and 50 over the last 52 weeks, that would mean a realized volatility of 35 would produce an RV Rank of 50%.

While it may seem like only a subtle difference exists between IV Rank and RV Rank, it is a very important one:

  • implied volatility = current market price for volatility

  • realized volatility = actual observed historical volatility

In order to reinforce these metrics, consider the hypothetical stock QRS in the current trading environment.

While filtering for trading ideas, you notice that the IV Rank for QRS has jumped to 75%. Depending on your strategy and associated decision-making process, that may alone be enough to catalyze “live” trade deployment.

However, you may also decide to examine this potential trade idea from another angle using Realized Volatility Rank (RV Rank). Now imagine that you check the current RV Rank for stock QRS and see that it is 100%.

Obviously, this changes the complexion of the potential trade by a wide margin.

According to RV Rank, stock QRS is moving the most it has at any point observed during the last 52 weeks. But according to IV Rank, implied volatility in QRS is only trading for 75% of the highest levels observed during that same timeframe.

That situation might make a trader reconsider the relative attractiveness of the opportunity, because actual volatility is cresting at such a high level. Imagining a second hypothetical scenario, in which RV Rank is 25% and IV Rank is 75%, one could see how a trader might feel more compelled (all else being equal) to deploy a short premium position.

In the latter example, realized volatility is only at 25% of the highest levels observed in the last 52 weeks, while implied volatility (i.e. the market price) is 75% of the highest levels observed over the same period.

The graphic below, excerpted from The Ryan & Beef Show, highlights several well-known stocks and their current levels of IV Rank and RV Rank:

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As you can see in the image above, a trading analysis that combines both implied volatility and realized volatility provides a slightly more robust perspective on the quality of a potential opportunity.

We hope you’ll take the time to review the complete episode of The Ryan & Beef Show focusing on IV Rank and RV Rank when your schedule allows. And if you want to take a deeper dive on these analytics, we also recommend a follow-up installment of Ryan & Beef.

If you have any outstanding questions on IVR or RVR, don’t hesitate to leave a message in the space below, or reach out to Ryan and Beef directly at support@tastytrade.com.

As always, we look forward to hearing from you!


Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.


Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.