Market Measures

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High IV | Less Time

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.

This segment reveal the results of a study to determine if, when shorting a straddle, selling one with fewer days remaining is more profitable under high IV conditions. Can we improve our metrics by shortening the time-frame under high IV conditions?

Two key factors that determine the price of an option are volatility and time. Previous Market Measures (5/2/15) have shown that when IV Rank is low you need to extend duration to receive a similar credit.

The market is expecting a larger move over a given timeframe when IV is high. There is a greater probability that the underlying will move away for the current price. Using a shorter timeframe appealing when placing a delta neutral, short premium trade, ie. a straddle or a strangle seems to make sense. The question is if it still make sense after testing.

The study used EWW, GLD, IWM, SPY and TLT. The time period covered was from 2009 - Present. It was limited to high IV conditions (above 50). At-the-money (ATM) Straddles were sold on the first trading day of the month. One was sold at the expiration closes to 45 DTE and the other at 15 DTE. All trades were held to expiration. A table showed the results for each for total P/L, profitable trades, average days held and avg P/L per day.

Watch this segment of Market Measures with Tom Sosnoff and Tony Battista to learn the takeaways and see the study results on whether shortening duration when selling straddles during periods of high volatility.

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