overstates the predicted by the theoretical model. Our studies at tastytrade have proven this to us and the edge this provides is a big reason why we are . The Market Measures from May 13, 2016: showed that the expected moves are overstated in all environments. A graph displayed the percentage of days the S&P 500, Nasdaq and Russell 2000 are within the four percentage ranges. The graph showed that the indices stay within 0-25% IVR most of the time with 75-100% the least. So although we know the expected move is overstated overall, is it also overstated in the lowest IVR percentage range where it most often is?
Our study was conducted in the SPX, NDX and RUT from 2005 to the present. We calculated the IVR every day (6500 occurrences) and compared actual moves to the 1expected moves for 45 days. We tested for when IVR was below 25% and when it was 25-50%.
A table of the results showed that volatility was overstated from actual when IVR was trading below 25%. It further showed that the expected move was overstated the most when it was in the 25-50% range. Our previous studies though have indicated that the highest IVR range, above 75% is the most profitable but occur the least amount of the time.
For more on Implied Volatility and Volatility Overstatement see:
Market Measures from March 3, 2015:
The Skinny On Options Math from April 16, 2015:
Market Measures from December 3, 2015:
Watch this segment of Market Measures with withand for the important takeaways and the results of our study which show that implied volatility is overstated in low IVR, and how there is still an opportunity in selling premium in relatively low IV.