Implied volatility tends to be mean reverting over the long run. How much more do we earn as premium sellers when we sell premium and IV declines throughout the trade?Study
- SPY, 45 DTE
- 2005 - present
- 16 delta strangles (16 delta put and 16 delta call)
- Compared P/L when VIX on entry was higher to P/L when VIX on entry was lower
- Observed how often VIX was higher or lower at expiration based on IVR
We find that IV declines throughout the course of our trade 54% of the time, and we can use IV Rank to increase that percentage. A higher IV Rank, the better the chance that IV will decline and earn premium sellers more profits.