IV/HV Ratio

The IV/HV ratio compares implied volatility (what the market expects) to historical volatility (what actually happened). An IV/HV ratio of 1.0 means options are priced consistently with recent stock movement. A ratio above 1.0 means implied volatility exceeds historical volatility — options are pricing in larger moves than the stock has been making. A ratio below 1.0 means the opposite — options may be underpricing potential movement based on the stock's actual behavior.

This ratio is fundamental to determining whether options are cheap or expensive in absolute terms. While IV Rank tells you where current IV sits relative to the stock's own IV history, IV/HV ratio tells you whether that IV level is justified by actual price movement. A stock might have low IV Rank (IV is cheap relative to its own history) but high IV/HV ratio (IV still exceeds what the stock has been doing), which presents a conflicting signal that requires deeper analysis.

For option sellers, an IV/HV ratio significantly above 1.0 represents potential opportunity. If you sell options when implied volatility is 40% but the stock has only been moving at 25% historical volatility, you're collecting premium as if large moves are coming while the stock continues trading calmly. The risk, of course, is that implied volatility is forward-looking — it may be elevated because informed traders anticipate upcoming events or regime changes that historical volatility can't capture.

Options Pilot incorporates IV/HV ratio analysis within the Value pillar, using it alongside IV Rank and IV Percentile to build a comprehensive picture of option pricing. The system also tracks IV/HV ratio trends over time, which can reveal whether the gap between implied and realized volatility is widening (increasingly rich options) or narrowing (mean reversion underway). This multi-dimensional approach prevents over-relying on any single volatility metric when assessing whether to buy or sell options.