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Why Volatility Always Comes Back: Mean Reversion and IV Rank Explained.
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Breakdown
0:00lesson
Volatility Mean Reversion — long-term average around 16-17
- Volatility tends to mean revert over time
- Higher volatility contracts back to long-term average
- Lower volatility expands back to long-term average
- Asymmetry exists between expansion/contraction
2:11lesson
Implied Volatility Rank (IVR) — quantifies volatility position
- IVR measures current volatility in 12-month range
- IVR = (current IV - annual IV low) / annual IV range * 100
- 75 IVR = higher than 75% of historical volatilities
- 30 IVR = higher than 30% of historical volatilities
4:07SBUX· ticker
Starbucks — IV rank 64.3
- IV rank 64.3 = higher than 64% of historical volatilities
- Implied volatility at higher end of range
- Pair with mean reversion for trade opportunities
6:01AMD· ticker
AMD — IV rank 99.9
- IV rank 99.9 = near top of 12-month volatility range
- Earnings date August 4th drives volatility
- High IVR suggests potential for mean reversion
7:44QQQ· ticker
QQQ — IV rank 64.5
- IV rank 64.5 = higher than 64.5% of historical volatilities
- Implied volatility at upper end of range
- Pair with mean reversion for trade opportunities
7:45SPY· ticker
SPY — IV rank 32.5
- IV rank 32.5 = lower than 67.5% of historical volatilities
- Implied volatility at lower end of range
- Pair with mean reversion for trade opportunities
7:46DIA· ticker
DIA — IV rank 19.2
- IV rank 19.2 = lower than 80.8% of historical volatilities
- Implied volatility at lower end of range
- Pair with mean reversion for trade opportunities
7:47IWM· ticker
IWM — IV rank 22
- IV rank 22 = lower than 78% of historical volatilities
- Implied volatility at lower end of range
- Pair with mean reversion for trade opportunities
7:48SLV· ticker
SLV — IV rank 28.4
- IV rank 28.4 = lower than 71.6% of historical volatilities
- Implied volatility at lower end of range
- Pair with mean reversion for trade opportunities
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