IVP likely refers to Implied Volatility Percentile, which is calculated to understand how the current implied volatility of an asset compares to its historical range.
Understanding Implied Volatility Percentile (IVP)
The Implied Volatility Percentile (IVP) helps traders gauge whether the current implied volatility is high or low relative to its past values. This can be a useful indicator for potential trading opportunities.
How to Calculate IVP
The IVP calculation answers the question: "Over a given lookback period, what percentage of time has the implied volatility been lower than the current implied volatility?"
Here's the breakdown:
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Determine the Lookback Period: Decide on the timeframe you want to analyze (e.g., 52 weeks, 252 trading days).
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Gather Historical Implied Volatility Data: Collect the implied volatility data for the asset over the chosen lookback period.
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Count the Occurrences: Count the number of days (or periods) within the lookback period where the implied volatility was lower than the current implied volatility.
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Calculate the IVP: Divide the number of occurrences (from step 3) by the total number of periods in the lookback period and multiply by 100.
*IV Percentile = (Number of Days IV Was Lower Than Current IV / Total Number of Days in Lookback Period) 100**
Example
Let's say stock XYZ currently has an implied volatility of 30%. You analyze the past 252 trading days and find that, for 160 of those days, the stock's implied volatility was below 30%.
In this case, the IV Percentile is calculated as:
(160 / 252) * 100 = 63.49%
This means that the current implied volatility of 30% is higher than it has been 63.49% of the time over the past 252 days.
Interpretation
A high IVP (e.g., above 75%) suggests that the current implied volatility is relatively high compared to its historical values, potentially indicating an overpricing of options and an opportunity to sell volatility. Conversely, a low IVP (e.g., below 25%) suggests that the current implied volatility is relatively low, potentially indicating an underpricing of options and an opportunity to buy volatility.
