What Is IV Rank? One Analogy That Makes It Click

This article assumes you understand what IV (Implied Volatility) is. Not yet? Start here: What Is Implied Volatility (IV)?

If you trade Bull Put Spreads or any premium-selling strategy, you've probably heard "enter when IV is high." But what exactly is IV Rank — and why IV Rank instead of IV itself? In our backtest of 846 BPS trades, filtering by IV Rank actually reduced CAGR from 133.5% to 79.2%, which is why understanding what IV Rank actually measures (and what it doesn't) matters.

An Analogy That Makes It Click

Think of a convenience store that sells umbrellas for $100 on a normal day.

When a typhoon is coming, the price jumps to $300. IV Rank is high — compared to the past year, umbrellas are expensive right now.

In the dry season, umbrellas go on sale for $60. IV Rank is low — cheaper than usual.

Options work the same way. Implied Volatility (IV) is the umbrella price. IV Rank tells you whether that price is expensive or cheap right now.

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IV vs. IV Rank — What's the Difference?

IV (Implied Volatility): the raw number — like the umbrella's absolute price.

• SPY's IV today is 18%. Is that expensive or cheap? You can't tell without context.

IV Rank: where today's IV sits within its 1-year range.

• SPY's 1-year IV range: Low 12%, High 35%. Today: 28%.
• IV Rank = (28 - 12) ÷ (35 - 12) × 100 = 70%
• Translation: SPY options are more expensive than 70% of all days in the past year.

IV Rank gives you instant context. No need to look up historical data manually.

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A Real Example

March 16, 2020. COVID crash. SPY dropped 12% in a single session. VIX closed at 82.69 — the second highest reading in history, behind only 2008.

SPY's IV Rank that day was essentially 100% — more expensive than any point in the prior year. Options were priced 4–5x higher than normal.

If you had sold a 30-day SPY put that morning, the premium was enormous. But it was also the scariest morning to do it, because the market looked like it was going to zero.

This is the dual nature of IV Rank. It tells you how much you can collect. It doesn't tell you which way things will move. Sellers who positioned far enough out (low Delta) made good money over the following weeks. Those who got too close, or panicked out early, did not.

High IV Rank = good structural setup. Not a guarantee.

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Why Premium Sellers Care About IV Rank

The premium seller's playbook is simple: sell overpriced options, wait for them to decay.

Sell the umbrella when it's $300. Buy it back when the storm passes and it drops to $100.

• High IV Rank (> 50%): options are expensive, you collect more premium — seller's market
• Low IV Rank (< 20%): options are cheap, thin premium, poor risk/reward — wait

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A Counterintuitive Finding From Our Backtest

Here's the thing though — we backtested 846 BPS trades, and found something unexpected:

Filtering entries by IV Rank actually made performance worse.

Why? We looked at the IV Rank of winning vs. losing trades — the distributions were nearly identical. Winners had a median IVR of 22.3%, losers had 21.5%. IV Rank had almost no predictive power over individual trade outcomes.

High IV does mean you collect more premium. But filtering for it also means you skip a huge number of profitable low-IV trades. For BPS sellers, waiting for high IV is an opportunity cost problem.

The practical takeaway: IV Rank is an informational signal, not an entry gate. Use it to understand the environment, not to disqualify trades.

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One Exception: Earnings

Pre-earnings IV is naturally elevated — the market is pricing in expected volatility. After earnings, IV collapses (called IV Crush). For sellers, an IV Crush after earnings can be profitable — but the directional risk from the earnings report itself can't be offset by IV Rank alone.

Don't enter BPS just because IVR is high before a known event.

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Remember This

IV Rank tells you whether options are expensive. It does not tell you which way the stock will move.

It's one input among several — pair it with Delta for strike selection, DTE for expiration timing, and technical levels for your short put placement.

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All of this — IV Rank, IV Percentile, and historical range for every watchlist symbol — is what the BPS Tracker Screener calculates automatically. You don't need to manually look up each stock's 52-week IV range. The Screener scans your watchlist in real time and surfaces which names are showing elevated IV today.

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IV Rank tells you whether options are expensive on a given stock. But there's another dimension it doesn't capture: is the market specifically afraid of downside, rather than volatility in general?

That's what Skew measures — and if you sell puts, it's worth understanding.

What Is Options Skew? Why Downside Protection Always Costs More →