Market Measures

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IV Contraction & Expansion

Market Measures

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Here at tastytrade, one of our main trading edges lies in selling premium when Implied Volatility (IV) is high. This allows us to collect more premium for the trades that we are placing and increase our probability of profit (POP). Today. Tom Sosnoff and Tony Battista look to put some numbers around how long it takes for IV to expand. They also look at how quickly IV contracts back to low levels. This helps them put a lot of context around why it is so important to take advantage when IV is high. The guys find out that IV tends to be in its lower range two-thirds of the time and that IV contracts much faster than it expands, taking an average of 231 days to expand and only 111 to contract. Since IV is high only one-third of the time and contracts much faster than it expands, it is very important to take advantage of these limited opportunities and scale into these trades. This allows you to capture a larger return on capital and increase your overall profit!

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