In the Black-Scholes model, the variables time and volatility go hand in hand. This means that theoretically, if volatility is low, we can extend duration to make up for the lack in premium, and if vol is high, we can reduce duration. Today's market measure looks into why this is.
In the Black-Scholes pricing model, volatility and time variables are always together. So mathematically, time and volatility can help offset each other when either one is too low.
So we know that premium can be adjusted with time when vol is high or low, but what about our bottom line?
Can we adjust our duration based on IVR to keep our bottom line consistent?
To test this we developed a study that first looked at 45 dte options and how they varied based on IV Rank in high and low environments. Next we examined how varying DTE in different IVR environments changed the outcome. Check out the segment to see the results!