IV drip
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Do Traders Have Anything to Gain From Shorter IV Ranking Periods?

By:Kai Zeng

The strategy introduces volatility that creates opportunity—but not necessarily better outcomes

Implied volatility rank (IVR) serves as a crucial metric for traders who rely on options to speculate on stock movements. By quantifying a stock's current implied volatility against its historical range, typically over the past year, IVR provides insight into the pricing of options. For example, a high IVR for Apple (AAPL) indicates its options are relatively expensive compared to their historical levels, which could inform a trader’s decision on whether to sell options to collect premiums or wait for a more opportune moment.

IVR Periods

The period over which IVR is calculated can significantly influence the metric's utility. While it's common to use a one-year lookback period, traders often experiment with shorter intervals, such as six months or one month, to assess their impact on trading performance. For instance, Amazon (AMZN) might show a different IVR on a six-month timeframe than on a one-year timeframe, potentially affecting the strategies used by options traders.

IVR equation

Shorter lookback periods can lead to higher IVRs, but this is not a hard and fast rule. It's important to note that while a shorter lookback period may increase the IVR on paper, it also adds volatility to the metric itself. This volatility can be double-edged; it may create more frequent trading opportunities, but it doesn't necessarily lead to better trading outcomes.

Exploring IVR Lookback Periods

An analysis of S&P 500 ETF Trust (SPY) 20 delta Strangles over a decade-long period revealed that while the number of trades could increase with shorter lookback periods, the overall performance of the trading strategy remained consistent. This suggests that traders might engage in more transactions without necessarily improving their win rate or profitability.

SPY Strangle

These findings are instructive for traders across various popular stocks, such as Tesla (TSLA) or maybe Microsoft (MSFT), who might consider adjusting their IVR lookback period to identify more trading setups. However, the analysis underscores that an increased number of trades does not equate with enhanced performance.

In conclusion, modifying the IVR lookback period can indeed affect the level of this metric and potentially lead to a higher frequency of trades. However, traders should weigh the benefits of increased opportunities against the consistent performance of their strategies.

Ultimately, the key takeaway for trading options is that while adjusting the lookback period can offer more entry points, it does not inherently improve the odds of success. Therefore, traders should focus on developing robust strategies that perform well over time instead of excessively tweaking the parameters in search of a performance edge that may not exist.

Kai Zeng, director of the research team and head of Chinese content at tastylive, has 20 years of experience in markets and derivatives trading. He cohosts several live shows, including From Theory to Practice and Building Blocks. @kai_zeng1 

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

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