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Every options education resource tells you the same thing. IV rank is high, sell premium. IV rank is low, buy premium. Vol is mean reverting, so trade the reversion. Simple.
I believed this for two years. Then I actually tested it against my own fills and the reality is a lot more nuanced than the YouTube version.
Background. I run systematic short vol on SPX, mostly iron condors and strangles, 15 to 40 contracts a week. Over the last six months I tagged every single entry with the IV rank and IV percentile at the time I put the trade on, then tracked the realized return on that specific trade through to close. 214 round trip trades total.
What everyone assumes
High IV rank means you're collecting rich premium. The vol will revert to its mean. You pocket the difference between implied and realized. Repeat. Get rich. Tell Reddit about it.
What actually happened
I bucketed every trade into four groups based on IV rank at entry.
1. IV rank 0-25 (low vol environment): 31 trades. Average return per spread: +$0.38. Win rate: 71%.
2. IV rank 25-50 (normal): 84 trades. Average return per spread: +$0.52. Win rate: 74%.
3. IV rank 50-75 (elevated): 68 trades. Average return per spread: +$0.81. Win rate: 78%.
4. IV rank 75-100 (high vol): 31 trades. Average return per spread: +$0.44. Win rate: 61%.
Read that again. The highest IV rank bucket had the second worst average return and the worst win rate in the entire sample.
Why the high IV rank bucket underperformed
Three reasons and none of them are complicated once you see them.
First, IV rank is high because something is happening. Earnings, macro events, FOMC, geopolitical risk. The vol isn't elevated for no reason. When you sell into IV rank above 75 you're selling into an environment where the market is pricing a real catalyst. Sometimes the catalyst delivers a move that blows through your strikes. The 61% win rate isn't because the premium was bad. It's because the 39% of losers were significantly larger than the losers in calmer environments. One blown iron condor in a high vol week can wipe out four winners.
Second, the mean that vol reverts to isn't static. This is the part nobody talks about. When people say "vol is mean reverting" they picture a fixed line and vol bouncing around it. But the mean itself shifts. Anyone who sold premium in 2017 and then tried the same thing in 2022 knows what I'm talking about. Completely different vol regime, completely different baseline. When IV rank says 80 it's telling you vol is high relative to its own recent range. It's not telling you whether that range is about to shift higher. In a regime change, IV rank of 80 isn't the top of the range. It's the new floor. Selling into what you think is the reversion point and finding out the mean just moved above you is how you get a month that ruins your quarter.
Third, execution drag is worst when IV rank is highest. This connects back to the fill tracking I posted about previously. When vol is elevated, bid ask spreads on individual legs widen. Market makers are more uncertain about their hedges so they price that uncertainty into wider markets. On a 4 leg IC in a high vol environment I was giving away 20-30 cents per spread on fills versus 12-18 cents in normal conditions. The theoretical premium looks fattest exactly when the execution cost of capturing it is highest. You're looking at a big credit on your screen and by the time you actually get filled, a meaningful chunk of it is gone.
Where the edge actually lives:
The sweet spot in my data was IV rank 40-70. Not the extremes. The middle.
In this range vol is moderately elevated, meaning you're collecting decent premium, but the catalysts driving the elevation are usually digestible. Earnings are priced but not for a binary blowout. Macro risk is present but not acute. The market makers aren't panicking so spreads are reasonable and fills are clean.
My best risk adjusted returns over six months came from trades entered when IV rank was between 50 and 65. Not screaming high. Not low. Just comfortably above average with no obvious catalyst that could gap through my position overnight.
The practical change:
I used to get excited when IV rank crossed 75 because every resource I'd read said that was the signal to pile on premium. Now I actually reduce size in those environments. I still sell, but I cut contracts by about 40% and widen my wings further. The premium per spread is lower but the survivability of the position is much higher.
Conversely I used to skip trades when IV rank was in the 40-50 range because it didn't feel like enough premium. Turns out those "boring" trades had the best combination of win rate, average return, and manageable drawdowns. I now take full size in that range without hesitation.
The uncomfortable conclusion:
Vol is mean reverting. That part is true. But the tradeable edge from that reversion isn't "sell when high, buy when low." It's "sell when moderately elevated and the path back to the mean is smooth, skip or reduce when the elevation is caused by something that could make the mean itself move."
The difference between those two statements is about 15% on annual returns in my book. And it took 214 tagged trades to see it because the simple version sounds so right that you don't question it until the P&L forces you to.
214 trades, 6 months, every one tagged and tracked. If anyone else is doing this kind of granular bucketing on their own fills I'd genuinely like to compare notes. Especially on whether the IV rank sweet spot shifts depending on the underlying or whether SPX is representative.