Implied volatility percentile tells you whether option premiums are cheap or expensive against their own past year. One table on which structures suit each zone, and what to avoid in it.
Traders often ask me when it is a good time to buy or sell index options. The number I look at is the IV percentile (IVP): the share of trading days in the past year on which implied volatility closed below today's level. An IVP of 80 means IV was lower than today on 80% of the days in the last year, so premiums are expensive by their own history. An IVP of 20 means they are cheap.
You can see IVP for the indices in Opstra, under Options, Options Dashboard.
The table collects what many traders have recommended over the years and what I have seen in my own trades. The column I would read first is the last one, what to avoid.
| IVP zone | What suits it | What to avoid |
|---|---|---|
| Low (0 to 30) Options are cheap. The market is calm; expect the range to widen. | Long straddles, debit spreads (bull call, bear put), calendar spreads. Buying low-IV options limits the capital at risk and gains if volatility jumps. | Selling premium. Short straddles, strangles and iron condors collect too little to justify the risk of a violent breakout. |
| Normal (30 to 70) Fairly priced, with no extreme skew. | Directional debit or credit spreads, butterflies. Volatility is neutral here, so the trade has to come from a clear technical or directional view. | Pure volatility plays. Do not rely on IV rising or falling to make money. Avoid directionless naked buying or selling; stay with defined-risk spreads. |
| High (70 to 100) Options are expensive, often before a major event such as an RBI policy or an election. | Short strangles, iron condors, credit spreads. Selling inflated premium gains from the IV crush once the uncertainty has passed. | Buying premium. Avoid naked long calls, puts and long straddles. Even if you get the direction right, the IV crush after the event can take the value out of your options. |
The table does not apply to intraday trades or to options one day or zero days from expiry. On an expiring option, IV has little effect on the price. It is guidance from experience, not a tested rule, and I would like to hear how it matches yours.
If you sell premium, the structure matters as much as the timing. My Finding Edge talk covers how I size credit spreads so that the worst day is known before I enter.
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