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IV Rank is Garbage. [Options Trading / Tastytrade Options Strategies] - YouTube
Channel: BestStockStrategy
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Why IV Rank is garbage. David Jaffee with
BestStockStrategy.com and in this
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video we are going to learn why you
should not use implied volatility rank and IV Rank. IVR is implied
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volatility rank it has been made popular
by tastyworks / tastytrade and Tom Sosnoff and Tony
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Battista. What IV Rank does is it measures the
high and the low of the implied
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volatility of a specific underlying over
the past 12 months and then states it as
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a percentage relative to his highs and
lows again just to be clear what IV Rank
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does is it looks at the current implied
volatility and then it compares it to
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the high of the implied volatility and
the low of the implied volatility and
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then it spits out a percentage of where
the current implied volatility ranks
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relative to the high volatility and the
low implied volatility of a specific
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underlying over the past year so you
would think that if a specific
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underlying currently has relatively high
implied volatility rank which would be
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something over about 50 or 60% then it
would be a good opportunity for you to
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sell premium in that security because
the implied volatility of that specific
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security is high relative to what it
normally is the problem with implied
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volatility rank is that it is subject to
extremes so right now it is December
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23rd 2019 just about a year ago on
December 24th 2018 they the S&P 500 was
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down around 80 points and then it had
about a hundred twenty point reversal
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intraday the reason why this is
significant is that right now at this
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specific moment the December 24th
reversal and the high point for the
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volatility is still factoring into the
one year time period in the one year
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look-back period what this means is that
the extremes are factored into and
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measured in the implied volatility rank
rank equation and as a result the
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current IV Ranks for all of the stocks in
your watchlist
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are in all likelihood artificially low
when compared with where they will be in
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just a few days once that December 24th
2018 day actually falls off an implied
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volatility actually normalizes again the
real problem with IVR is that it leaves
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you subject to the extremes both on the
high end and the low end so those people
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who scan their watchlist for high IVR
what they're doing is they're comparing
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IV rank against a base number the high
point where the ID are at that specific
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moment is not necessarily representative
of current market conditions and it's
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probably not representative during
normalized markets because when you look
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back at December of 2018 that was a very
high volatile environment where there
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was substantial fear in the market place
and I believe the sp500 lost close to
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around 20% in just one month as a result
you need to be extremely careful when
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factoring in and using those high IV
environments into your present day
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situation and into the present day
environment so those people who are
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scanning their watchlist for high IVRS
their IV ranks are artificially deflated
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what tastyworks should do is they
should look at the median implied
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volatility and then they should compare
that against the current volatility so
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the equation what it would look like is
you would have the current implied
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volatility as the numerator then you
would have the median implied volatility
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for that specific underlying as the
denominator that way when you use the
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median as your denominator you are not
having the outlier moves in implied
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volatility factored into an influence
your decision of whether you should make
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a trade in the present moment so again
you would look at the current imply
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volatility as the numerator then as the
denominator you would have the median
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implied volatility over a specific time
frame whether it be six months or 12
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months that's fine and then the higher
that number is the better so that would
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be a much more useful indicator on
whether a stock in your watchlist is
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worthy of you trading it David Jaffee
with beststockstrategy.com if you
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have any questions leave a comment below
I respond to everyone's comments
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