Market Measures

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Three Reasons to Trade High IV

Market Measures

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We prefer to sell premium during periods of high implied volatility because fear is often overstated… But selling premium in the face of a market downturn is daunting! Today, we hope to reduce that fear by showing three key benefits of selling premium in the face of fear.

Study:
  • SPY Strangles, Closest to 45 DTE
  • 2005 to Present
  • Compared delta:
    • 5, 10, 15, 20, 25, 30, 16, 40, 45, 50
  • Held All Trades Through expiration
  • VIX Threshold of 25 to Determine High Implied Volatility for Trade Entry
Results:

Selling strangles in high implied volatility leads to:

  1. Higher P/L
  2. Greater win rate
  3. Better return on capital

Try to avoid gut feelings during a market selloff and trust in the math. Fear is generally overstated with the SPY staying within its expected range 84% of the time compared to the expected 68% of the time. ‘Volatility’ is synonymous with ‘Opportunity’ and careful trading during periods of high implied volatility provides a variety of portfolio benefits.

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