Market Measures

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Outliers vs. IV

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.

We discuss many benefits of selling premium when implied volatility is high.

Today, we are going to visualize the relationship between implied volatility & P/L using a scatter plot.

What do we learn by looking at this plot?

  • SPY
  • Sold 1 SD Strangles
  • 45 DTE
  • Since 2005
  • Managed at 21 DTE
  • Created scatter plot between VIX levels at beginning of a trade and P/L at 21 DTE of the trade

75% of outliers (losses greater than $500) occurred when VIX was under 20. This suggests that contrary to popular belief, large losses occur when IV is low! High IV actually reduces risk of outliers.

This is tastytrade’s reasoning for trading small and trading often. When you have low IV, staying small reduces your exposure for an outlier move.

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