Donald J. Trump is now President of the the United States of America.

The VIX is currently trading between 10 and 11, with a historical average closer to 19.

If you think the above suggests that risk is mispriced, it's entirely possibly you've already acquired exposure to positions that outperform when volatility expands.

However, if your strategic approach is more geared to selling volatility, or short premium positions, you may be waiting for volatility to expand before you deploy additional risk in your portfolio.

If you do prefer short premium/volatility trades, a recent episode of Options Jive may be right up your alley. On the show, research is presented that helps illustrate how high implied volatility environments can help increase profits.

As you are probably already aware, Implied Volatility Rank (aka IV Rank or IVR) is a metric tastytrade uses to assess the relative value of implied volatility as compared to the last 52 weeks of trading. For example, if stock XYZ has had an IV between 30 and 60 over the past year and IV is currently at 45, XYZ would have an IV rank of 50%.

As you might expect, high IVRs are therefore necessitated by high implied volatility, which should also be confirmed by a rising VIX. The reverse would be true for lower IVRs.

Implied volatility typically rises when the demand for risk protection increases - this directly translates to higher extrinsic values across the options spectrum. Selling premium when extrinsic values are going up (or absolutely high) in turn theoretically increases the probability of positive returns (because more premium is collected by the seller) - as described in this previous blog post.

To help illustrate the above concepts, the Options Jive team calculated the historical price of straddles in SPY from mid-2015 to mid-2016. As shown in the graphic below, the research revealed that when IVR is below 50%, the average straddle price for SPY in options with 45 days-to-expiration was 4.2% of SPY value, as compared to when IVR is greater than 50%, and the same straddles rise to 6% of SPY value:

Building on the data in the slide above, tastytrade backtested the performance of selling SPY straddles when IVR was both above 50% and below 50% to discern trends in the performance of these positions. The study revealed that the average P/L of a short premium straddle in SPY during that timeframe increased by about 32% in higher IVR environments (i.e. IVR > 50%).

The increased P/L of high IVR trades was attributed to both higher option decay (theta) and reversion to the volatility mean (vega).

Of course, results will vary across different market conditions, and traders should ensure that the exposure detailed in this post fits their outlook, strategic approach and risk profile.

We hope you'll take a moment to review the entire episode of Options Jive focusing on high IVR environments and increased profit potential when your schedule allows.

If you have any comments or questions about this post or any other trading-related topic, we hope you'll reach out at support@tastytrade.com.

Happy trading!


Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.