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Diversification and IV Contraction

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Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

ETFs are inherently diversified, making them less prone to outlier moves and less volatile in general. However, does this diversification also make them more likely to experience significant short-term IV contraction? Today we determine how likely different sector ETFs are to IV contract short-term and compare those probabilities to contraction probabilities for high cap stocks in the same sector.

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