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Market Measures

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Choosing ETFs Based on Implied Volatility

Market Measures

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

A common strategy is to sell 1 standard deviation (SD) Strangles in underlyings with high implied volatility rank (IV Rank). Especially the stock index ETFs.

A study was conducted that sold 1 SD Strangles in SPY, IWM and QQQ every Monday from 2005 to present. The Strangles were scaled to represent $3,000 in buying power. A table of the results of the 489 trades per underlying was displayed. The table included the percentage profitable at expiration and the P/L when managed at 50% of max profit. We then modified the strategy by entering only the ETF with the highest IVR on each trade date.

The results showed that when selling strangles in the ETF with the highest implied volatility and IV rank, the profitability and probabilities of the strategies increased significantly.

Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and the dramatic study results comparing short 1 SD strangles in SPY, QQQ and IWM.

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