Market Measures

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Varying Profit Targets with Implied Volatility

Market Measures

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We have often talked about varying profit targets in our options strategies to find the optimal percentage of the maximum profit for taking off a trade. This entails finding the level at which waiting for more profits is not worth the risk of holding the trade longer, and we have found this percentage to be around 50% for short Strangle trades.

Today, however, we have managed to put some research together regarding changing profit targets as the volatility of the underlying market changes. That is, we attempted to increase profits when implied volatility (IV) was low and mitigate risk when IV was high as measured by IV Rank (IVR).

The Study
  • Managed profits at 50% in all trades
  • Managed profits at 75% when IVR < 50%
  • Managed profits at 25% when IVR > 50%
  • Short Strangles (16 Delta) in SPY
  • 2005 to present
The Results

We found that our 50% management target for all IV Rank environments performed more consistently than the alternatives. Taking smaller profits when implied volatility was high hurt average profits while only slightly decreasing the risk of the trade. However, looking for greater profits in low IVR actually increased profits significantly while only marginally increasing risk.

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