What IV Rank Should You Look For When Screening Covered Calls to Sell?

The Short Answer: Target IV Rank of 50 or Higher

When screening covered calls to sell, most experienced traders look for an IV Rank (IVR) of 50 or above. At that level, implied volatility is elevated relative to the past year, which means option premiums are fatter than usual — and you collect more income for the same risk. Below 30, premiums are often too thin to justify the trade.

IV Rank is not the only filter you need, but it is the first one worth checking. Think of it as a price tag on volatility. When IVR is high, you are selling expensive options. When it is low, you are selling cheap ones. The goal of a covered call is to sell expensive.

What Is IV Rank and How Is It Calculated?

IV Rank compares today's implied volatility (IV) to the stock's own IV range over the past 52 weeks. The formula is straightforward:

IVR = (Current IV − 52-week IV Low) ÷ (52-week IV High − 52-week IV Low) × 100

The result is a number between 0 and 100. A reading of 0 means IV is at its yearly low. A reading of 100 means IV is at its yearly high. A reading of 60 means today's IV sits 60% of the way up from the low to the high.

This is different from IV Percentile, which counts the number of trading days in the past year where IV was lower than today. Both metrics are useful, but IV Rank is more sensitive to recent spikes and is the more widely quoted figure on retail platforms. The Options Industry Council (OIC) provides free educational material explaining both metrics if you want to dig deeper.

One important note: IV Rank is always stock-specific. A rank of 60 on AAPL and a rank of 60 on a small-cap stock are not the same risk. Stick to liquid, large-cap names where the options market is deep and spreads are tight.

Why IV Rank Matters More Than Raw IV

Raw implied volatility numbers are hard to compare across stocks. NVDA might have an IV of 45% while SPY sits at 15%. Does that mean NVDA options are expensive and SPY options are cheap? Not necessarily. NVDA almost always has higher IV than SPY because it is a more volatile stock. What matters is whether today's IV is high or low relative to that stock's own history.

That is exactly what IV Rank tells you. If NVDA's 52-week IV range is 35% to 80%, and today's IV is 45%, the IVR is about 21 — meaning volatility is actually near the low end of its range. Premiums will feel thin. On the other hand, if NVDA's IV spikes to 70% after an earnings scare, the IVR jumps to around 78. Now you are selling a much richer premium for the same strike and expiration.

Selling covered calls when IVR is low is one of the most common mistakes new covered-call traders make. They see a dollar amount of premium and think it looks fine, without realizing that premium is historically cheap for that stock.

A Worked Example: Selling a Covered Call on NVDA

Let's walk through a concrete example. Suppose you own 100 shares of NVDA, currently trading at $875 per share. You are considering selling a 30-day covered call at the $920 strike.

Scenario A — Low IVR (IVR = 22): NVDA's IV is sitting near its yearly low. The $920 call is bid at $8.50, giving you $850 in premium on a $87,500 position. That is roughly a 0.97% return for 30 days, or about 11.7% annualized. Not terrible, but you are capping your upside for a historically cheap price.

Scenario B — High IVR (IVR = 68): After a broad market selloff, NVDA's IV has climbed. The same $920 call, same strike, same 30 days to expiration, is now bid at $22.00. That is $2,200 in premium — more than double — on the same position. Your 30-day return jumps to about 2.5%, or roughly 30% annualized.

Same stock. Same strike. Same expiration. The only difference is when you sold. This is the core argument for using IV Rank as a screening filter. You are not changing what you own; you are choosing when to rent it out.

For reference, the CBOE publishes the VIX as a real-time measure of 30-day implied volatility on the S&P 500. While VIX is an index-level tool, it gives useful context for whether the broader market is in a high or low volatility environment, which often influences individual stock IVR readings.

How to Build a Simple IV Rank Screening Checklist

You do not need a complex system. A four-filter screen catches most of the good setups:

1. IV Rank ≥ 50. This is your primary filter. Some traders use 40 as a minimum in slower markets, but 50 is a solid default.

2. Stock is liquid and optionable. Look for average daily options volume above 10,000 contracts and a bid-ask spread on the option under $0.15. Tight spreads mean you are not giving away your edge at entry and exit. FINRA reminds retail investors that wide spreads on thinly traded options can significantly erode returns.

3. Earnings are not within the next 30 days. Selling a covered call into earnings is a separate, higher-risk strategy. If you are not intentionally trading around earnings, screen them out. Earnings events cause IV to collapse after the announcement — a phenomenon called IV crush — which can work for or against you depending on your position.

4. Delta of the short call is between 0.20 and 0.35. This range keeps you out-of-the-money enough to have a reasonable chance of keeping the premium, while still collecting meaningful income. Calls with delta below 0.15 are often too cheap to bother with unless IVR is extremely high.

Once a stock passes all four filters, look at the specific strike and expiration. Most covered-call traders target 21 to 45 days to expiration (DTE) because that is where theta decay — the daily erosion of option value — accelerates most reliably.

The Real Risks You Need to Understand Before You Screen

High IV Rank is a signal that the market expects bigger price swings ahead. That is why premiums are fat. You are being paid more because the risk of a large move — up or down — is higher than usual.

The upside risk: If you sell a covered call and the stock rips 20% higher, you miss most of that gain. Your shares get called away at the strike price. You keep the premium, but you do not participate in the rally above your strike. This is the fundamental trade-off of every covered call.

The downside risk: A high IVR often signals real uncertainty. The stock could drop sharply. Your premium provides a small cushion — in the NVDA example above, $2,200 on an $87,500 position is about a 2.5% buffer — but a 10% or 15% drop still hurts. The covered call does not protect you from a serious decline. The SEC has published investor guidance noting that options strategies, including covered calls, do not eliminate the risk of loss on the underlying stock.

Tax considerations also matter. In the US, if your covered call is deemed a qualified covered call under IRS rules, it may affect the holding period of your shares and therefore whether gains are taxed at short-term or long-term capital gains rates. Canadian investors should check CRA guidance on how option premiums are treated as income versus capital gains, as the rules differ from US treatment. Consult a tax professional before trading covered calls in a taxable account.

Finally, do not chase IVR alone. A stock with IVR of 90 might be in freefall. High volatility can mean the business is in trouble. Always combine your options screen with a basic check on why volatility is elevated.

Putting It All Together: A Practical Workflow

Here is a repeatable process you can run weekly on stocks you already own:

Step 1: Pull up your holdings and check IVR for each one. Most retail brokerages — thinkorswim, Tastytrade, Interactive Brokers — display IVR directly on the options chain or in a watchlist column. If yours does not, the OIC website has tools and resources to help you find this data.

Step 2: Flag any position where IVR is 50 or above and earnings are more than 30 days away.

Step 3: On those flagged positions, look at the 30-to-45 DTE options chain. Find the strike with a delta between 0.20 and 0.35. Check the bid price and make sure the spread is tight.

Step 4: Calculate your potential return. Divide the option bid by the current stock price. If the 30-day return is at least 1% to 2% and you are comfortable with the strike as a potential exit price for your shares, the trade is worth considering.

Step 5: Set a management rule before you enter. Many traders close covered calls when they have captured 50% of the maximum premium, regardless of time remaining. This locks in profit and frees up the position for the next trade. It also reduces the risk of a late reversal eating into your gains.

Consistency matters more than finding the perfect trade. Selling covered calls at IVR 50+ on a regular schedule, on stocks you already own and believe in, is a straightforward way to generate income on a portfolio that would otherwise just be sitting there.

What IV rank is too low to sell a covered call?

Most traders consider IVR below 30 too low to sell covered calls, because premiums are historically cheap and the income does not justify capping your upside. Between 30 and 50 is a gray zone where you might sell if you have a specific reason, such as needing to reduce cost basis quickly. Below 20, it is usually better to wait for a higher-volatility environment.

Is IV rank the same as IV percentile?

No, they measure different things. IV Rank compares today's IV to the 52-week high and low using a simple formula, so a single volatility spike can heavily influence the reading. IV Percentile counts what percentage of trading days in the past year had lower IV than today. Both are useful, but IV Rank is more commonly displayed on retail platforms and reacts more sharply to recent spikes.

Should I sell covered calls before or after earnings if IV rank is high?

Selling before earnings captures the elevated premium, but exposes you to a large gap move in either direction after the announcement. If the stock drops sharply, your premium provides only a small cushion. Most conservative covered-call traders avoid selling calls in the 30 days before an earnings date and wait until after the report, when IV has settled back down, to reassess.

What IV rank should I use for SPY covered calls specifically?

SPY tends to have lower absolute IV than individual stocks, so the same IVR thresholds still apply — look for 50 or above. The CBOE VIX is a useful companion indicator for SPY traders; when VIX is above 20, SPY's IVR is often elevated enough to produce meaningful covered-call premiums. When VIX is below 15, SPY premiums are typically thin.

Does high IV rank mean the stock is about to drop?

Not necessarily, but it does mean the options market is pricing in a larger-than-normal move in either direction. High IVR can be driven by earnings uncertainty, sector news, or broad market stress — none of which guarantee a decline. You should always investigate why IV is elevated before selling a covered call, because sometimes high volatility signals genuine fundamental risk in the stock.

How does IV rank affect the tax treatment of my covered call premium?

IV rank itself has no direct tax effect, but the premium you collect does. In the US, the IRS has specific rules on qualified covered calls that can affect whether your stock's holding period is paused, which matters for long-term capital gains treatment. Canadian investors should review CRA guidance, as option premiums may be treated as income or capital gains depending on the circumstances. Always consult a qualified tax professional before trading covered calls in a taxable account.