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Market Measures

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VIX: Cluster, Pop, Revert!

Market Measures

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Unlike stocks, volatility products move in a distinct way based on their underlying math equation. Based on this formula, VIX tends to cluster at low levels, pop aggressively to the upside, then revert back to its average. Given this reversion to the mean, does it make sense to sell strangles in SPY after varying percent increases in VIX?

The Study:
  • SPY
  • 45 Days to Expiration
  • 20 Delta Strangles
  • Held to Expiration
  • Sold Strangles after Varying % Increases in VIX. We Measure % Increases as the Daily Change in VIX Closing Prices

It pays to sell strangles after volatility pops. Even though there are fewer trade occurrences waiting for VIX to spike, strangles see larger average P&L and similar standard deviations of P&L to selling in all VIX environments.

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