see this all the time. someone posts "IV rank is at 80th percentile, time to sell premium" like thats all you need to know. the problem is IV percentile tells you where vol is relative to its own history, not whether its actually overpriced relative to what's coming.
stock can be at 90th percentile IV and still be underpriced if theres a binary event ahead. stock can be at 20th percentile and still be rich if realized vol is about to die. the metric everyone should care about is IV vs expected realized vol, not IV vs past IV.
example: before earnings, IV always looks "high" on percentile. but if the stock historically moves more than implied, that "high IV" is actually cheap. you're selling into what looks expensive but is actually a bargain for the buyer.
this is why the "just sell high IV" crowd gets blown up once or twice a year. theyre using a rearview mirror metric to make a forward looking bet.
what i actually look at before selling:
- is IV above expected realized move for this specific catalyst?
- how has IV vs realized played out for the last 4-6 earnings cycles on this ticker?
- is the term structure in contango or backwardation and does that match the current setup?
- where is dealer gamma positioning, am i selling into a vol seller's market or a buyer's market?
curious what metrics other experienced sellers use beyond IV rank to decide if premium is actually worth selling
IV percentile is a terrible metric and most of you are using it wrong
byu/Equivalent-Ticket-67 inoptions
Posted by Equivalent-Ticket-67
5 Comments
this is actually why we built wormholequant.com. the whole point is scoring whether IV is mispriced relative to expected move using ML, not just telling you “IV is high.” been testing it on earnings setups and the difference between “high IV” and “actually overpriced IV” is where the real edge is. free beta still open if anyone wants to try it! Thanks
Finally someone said it. The amount of people who sell strangles just bc “IV rank is above 50” without checking if its actually overpriced is insane. i started tracking IV vs realized on my own trades and it was eye opening, half the trades i thought were good sells were actually underpriced. Whats your take on using term structure slope as a filter? I found backwardation = dont sell works pretty well as a simple rule.
IV vs expected realized volatility is just IV vs IV.
IV rank is at 90th percentile bro
Doesn’t matter to me what the IV is, I’m always selling