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Options JiveIV Rank & Strategy Selection | Jan 6, 2017
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    Options JiveIV Rank & Strategy SelectionJan 6, 2017

    In today’s Option Jive segment, Tom and Tony review some of the intricacies of IV Rank. Since tastytraders are primarily option sellers as opposed to buyers, the preference is to sell options when they are more expensive, which exists in high Implied Volatility (IV) environments.

    We like to use IV Rank (IVR) to signal when IV is high relative to a given underlying’s IV prices from the previous year. The formula used to determine IVR is:

    IV Rank = Current IV - Min IV/ Max IV - Min IV

    As tastytraders, we select options strategies based on whether an underlying is exhibiting a High or Low IV Rank. The tastytrade threshold is 50% IVR. For low IVR environments (below 50%), Debit Spreads, as well as Calendars or Diagonals are the preferred strategies to use to place a trade. In High IVR environments, Straddles, Strangles, Credit Spreads, Iron Condors, Iron Flies / Butterflies, and Jade Lizards are optimal to use.

    Using an example of an SPY Strangle that was placed from 2005 to present and 45 DTE options, the Research Team shows the difference in the average credit received, the win rate and the average P/L in all environments as compared to when SPY IVR is above 50%. Though the win rate was slightly smaller in high IVR, the average credit received was 23.5% higher.

    In conclusion, IV Rank is a valuable gauge to tell when options are expensive and ripe for selling. Additionally, aside from premium selling, it is important to manage trades according to current IVR environments.

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