Market Measures

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Short-Term and Long-Term Fear

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.

A large decline in the market can turn what's usual in options upside down as the resulting pop in implied volatility (IV) causes short term volatility to exceed longer term volatility, so we ran a study to test if selling shorter term IV made sense in such a situation. Every option trader will benefit from watching this.

A table comparing the volatility of options with 8 days to expiration (DTE) to options with a 71 DTE in the SPY on January 7th 2016 (high volatility) was displayed. The table included the price of the VIX on that day. Tom explained why “it’s always sunny 71 days from now”.

We want to use our trading capital as efficiently as possible. We tested whether high IV (above 25) can provide an opportunity to sell shorter dated options. The study was conducted from 2010 to present using the SPY (S&P 500 ETF). We sold a 1 standard deviation strangle closest to 5 days to expiration (DTE) as well as closest to 45 DTE. We then compared these short strangles at all VIX levels and when the VIX was above 25.

A table of the results comparing short options with 5 DTE and 45 DTE was displayed. The table gave the percentages both options expired within the strikes and expired within breakevens when the VIX was above 25 as well as all days in the VIX.

Tom and Tony commented on why they usually avoid weekly options. They also elaborated on some of the risks. This is important information in addition to the study results.

Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the valuable takeaways and the study results comparing long term to short term options in high and low implied volatility.

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