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The Skinny On Options Modeling

P/L Context For IV Reversion

The Skinny On Options Modeling

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Whether IV is high or low, a 1% change in IV will have the same impact on a short premium strategy. Why are we focused on putting on short premium in High IV then?

The reason that a 1% change in implied volatility has the same impact no matter the level of IV is because gamma is mostly constant over a range of IVs, but varies due to expiration and underlying price. Although the P/L is the same regardless of IV level, the higher the IV, the higher the Standard Deviation. This means that the likelihood of a 1% reversion is greater when IV is higher.

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