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The Effect of IV on ROC

Market Measures

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Potential return on capital is a metric that tells traders how much opportunity is available in a particular trade. Since implied volatility is also a measure of opportunity, how are the two metrics correlated?

Study
  • SPY, 2005-present
  • 45 DTE, 16 delta strangles (puts and calls)
  • Recorded the potential return on capital (credit divided by buying power)
  • Recorded VIX

We find that implied volatility and return on capital are highly correlated and you can get around 2.5x as much ROC in a high IV environment compared to a low IV environment.

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