Trading in markets with high implied volatility provides a strategic advantage for premium sellers because of the rich credit. So just how great is thisedge?Study:
- 16 Delta SPY
- 45 DTE
- 2005 – 2017
- VIX Above 20
- VIX Above 25
Trading inmarkets yields better performance than trading in all markets by providing a higher average P/L and consistent win rate. However, the difference in average P/L is not as large we might expect because of the larger proportion of trades which occurred in 2008 for the high IV scenario. When we filter the data to exclude 2008 we see a much higher difference in average P/L for trading in high IV compared to the other scenarios.
The edge from trading in high implied volatility markets comes from the lower number of occurrences and high cumulative P/L. Although theis roughly one quarter of trading all markets, our cumulative profits are more than 50% of that when trading all markets.