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Market Measures

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How Often Does IV Fall?

Market Measures

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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.

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