This indicator is meant to be a substitute for Implied Volatility Rank and Percentile for traders who do not have access to readily available options data. This indicator is based on the William's VixFix which is an indicator that mirrors the VIX, which charts the implied volatility of the SPX. The great thing about the VixFix is that it can be applied to any security, not just the SPX.
IV Rank is calculated by taking the highest and lowest values over the past however many periods you choose, and seeing what percentage of the way between those values the current IV value is. For example if over the past 5 periods the highest IV value was 30 and the lowest IV value was 10, and the current is 20; then the IV Rank would be 50% because 20 is 50% of the way between 10 & 30.
IV Percentile is calculated by looking at all of the past values, not just the highest and lowest, and seeing how many of those values were below the current. For example lets say over the past five periods the IV values were : 30,10,11,15, & 17; while the current IV value is 20. As stated before the IV Rank would be 50%, while the IV Percentile would be 80%, given that 4/5 of the values were below the current IV value of 20.
IV Rank and IV Percentile are often wrongly used interchangeably, but as shown here they are very different. Most people use IV Rank as their main options tool; while IV percentile is a great way to give IV Rank context. Whichever you choose to use, or even both, does not really matter as long as you use either one or both consistently.
IV Rank and IV Percentile are mainly used in this way: when IVR/IVP <50, buy options, when IVR/IVP >50 sell options. The reason that you buy options when IVR/IVP is low is because IV is mean reverting, so you would expect IV to eventually start increasing towards the mean, causing prices to move. The reason you would sell options when IVR/IVP is high is because IV is mean reverting and you would expect IV to decrease towards the mean, causing prices to move sideways.
In this script there are two lines, one denoting IVR and one denoting IVP. IVR is the line which is green when it's above 50 and red when below 50. IVP is the line which is aqua when above 50 and orange when below 50.
Release Notes
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The new update allows you to be able to choose the length of the data used for the VixFix. The recommended values to use for this indicator are 9, 22, 66, 132, or 252.
Here's why:
A VixFix value of 9 would replicate the 9-day VIX index, which looks at the expected annualized change over the following 9 days.
A VixFix value of 22, which is the default would replicate the 1 month VIX index, which looks at the expected annualized change over the following month. This is the VIX that most people look at.
A VixFix value of 66, which is the default would replicate the 3 month VIX index, which looks at the expected annualized change over the following 3 months.
A VixFix value of 132, which is the default would replicate the 6 month VIX index, which looks at the expected annualized change over the following 6 months.
A VixFix value of 252, which is the default would replicate the 1 year VIX index, which looks at the expected annualized change over the following year.