Market Measures

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Higher IVR? Higher Delta!

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.

When we are choosing delta while trading options, we also need to consider the IVR, because the speed of P/L expansion with regard to delta increase is faster with a higher IVR.

Our study using SPY strangles backs up this point. The study shows that when IVR is below 50, P/L increases less than 50% when delta increases from 10 to 30. And when IVR is above 50, P/L increases more than 150% when delta increases from 10 to 30.

Therefore, when IVR is high, a larger delta strategy is more preferable because large delta provides more substantial increases in P/L . And when IVR is low, a larger delta strategy is less favorable because it will lead to additional risk without fair compensation.

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