Tony: Thomas I'm back back my friend! Market Measures.

Tom: Yeah. S&Ps down $4. We'll see. It's kind of been weird, they've been…

Tony: I agree with you.

Tom: All over the place, first couple of minutes.

Tony: I didn't think he'd have a 15 point range, and I know this is overnight action, too, but I didn't think he'd have a 15 point range in the ME S&Ps after yesterday's action in the market. I think the "normal way" that we would look at this is say we'd have an inside day, probably well inside the implied volatility range of, let's say, 10 points or something like that.

Tom: Yeah, there's a lot of, and I don't usually buy a lot of stocks, but some of these oil stocks look, I know they were cheap already, but-

Tony: It's cheap, getting cheaper, right? Like XOP?

Tom: Cheap getting cheaper.

Tony: Another $1.30, 62, 61?

Tom: Yeah, well it rallied really back yesterday, they're right back on their butts where they were yesterday.

Tony: Yeah, right.

Tom: I don't know, I'm kind of just staring at the same …

Tony: Oil down 46 cents, it was lower but it's down 46 cents.

Tom: Right back to the lowest of where we were yesterday. I'm looking at just-

Tony: New lows, actually.

Tom: I'm actually looking at maybe buying some of these stocks here, just not that big, but just jump in a little bit. What do you think?

Tony: X has had a good range to it lately.

Tom: Oh my God, did you see the range on it yesterday? That was, it was nice.

Tony: Yeah.

Tom: Yeah, so I can't figure it out. I can't decide whether I should just, I'm going to take a little. I don't usually buy a lot of stocks [inaudible 01:51] those kind of stocks, but I figure that it's got to be-

Tony: Ring down 67 cents. Made a new low yesterday down at $29.77, you're about 70 cents off that.

Tom: I know, I know.

Tony: IV rank is high at 100.

Tom: I know, I kind of like it. I may just-

Tony: Earnings on November 3rd are seven and a half and third, two through seven, they haven't announced yet I don't think. Yes?

Tom: That's it, no. I just put a bid in to buy some at $50, we'll see. It was just offered there, they jumped it up. It's bouncing around. It traded a million shares so far today.

Tony: Yeah, yep. Option markets are a little bit wide in rate, especially in November.

Tom: Yeah, the options markets aren't very good. I spilled a little stock there just to, I don't have a lot of long stock right now, so a little bit of long stock? It's not going to kill me.

Tony: Sure.

Tom: All right, are you ready?

Tony: I am sir.

Tom: IV rank levels, we got a ton of good stuff coming up. We actually have back to back segments you're going to like. Jacob's coming in in about 15 minutes, and we're going to discuss Correlation beta, and R Squared, the three measure of independence. We've been focusing a lot on this lately, and Dr. Data just put together an amazing piece on beta as well, so we're going to hit you over the head with this stuff because we're learning so much now ourselves, and how important this whole independent occurrence and everything else is, and it's starting to fascinate us, you know? We joke about some of the other stuff, but the correlation studies along with managing winners, along with the high IV rank, it's really groundbreaking. It's cool as hell. Let's do it bet, high IV rank. I'm sorry, IV rank high levels. What we looked at here is, because if we start to get a little more volatility in the market, there's some rich underlyings. One you just mentioned, EWZ you just mentioned, some of the oil stocks, they're all kind of wrapped around 100 here. I think you just mentioned Rig, didn't you?

Tony: Yep!

Tom: About 100?

Tony: You did, 100.

Tom: 100, OK, and so I just bought some stock.

Tony: Right.

Tom: 100! 100 100!

Tony: 100 IV rank, yep.

Tom: Yes, so let's go through it a little bit here. Is there more edging here, the only thought? Because I kind of think there is.

Tony: I think so too after the studies that we've done.

Tom: Just looking at UAL today, just from the two sided action, everything else, really interesting. Implied Volatility.

Tony: Well there's another one with almost 194% IV rank.

Tom: Implied Volatility, IV, gives us our edge in trading. IV rank is a metric that we use to determine when volatility is at a high level, giving us, again, the most amount of perceived it. It's not real, it's just giving us what we think is the most amount of opportunity, because if you believe in volatility versions of the mean that's the whole game for us. Again, let me read this slide just so it makes a lot of sense and resonates: Implied Volatility, IV, gives us our reasons. I'm not sure if I like the term "edge," but it gives us a reason, a determination to make a trade. IV rank is a metric that we use to determine when volatility is high enough level to give us the most amount of that blank word, which could be "edge," but perceived edge or just synthetic edge, whatever you want to say. The reason it's synthetic edge is because actual volatility is lower than implied, and if you measure volatility against itself and you say that Implied Volatility is very rich, then Implied Volatility at it's height measured against itself has to be really rich. A lot of this I'll cover over the weekend. Increasing capital allocation and being more aggressive with strike selection in periods of high IV rank above 50 has shown to be the optimal time for selling premium, but with volatility returning to the market now a little bit, remember we just talked about it, maybe they're not going to stomp on this asset class as much as we thought before. We're currently seeing underlyings that are displaying levels of implied volatility rank of 75 and above. What does the data tell us for selling premium at these levels? Let's see. Here's the study: 2005 to present. So we basically went out 10 years. First trading day of the month, 45 days to expiration with IV rank about 100, we did the one standard deviation strains, which is 16% on each side, and held to expiration. As you can see, with the high IV rank levels it worked just fine. Again, this is, what is this? Anything with high IV rank?

Tony: Almost nine years of-

Tom: Nine years of, let me see what they did here. Guys, what is it? What's the limitation on the portfolio here? I just want to make sure. What is the portfolio of?

Tony: What do you mean "limitations?"

Tom: What's the portfolio?

Tony: One standard deviation strains-

Tom: No, I know. Of what?

Tony: I don't understand the question.

Tom: One standard] deviation strain of what?

Tony: Oh, of what…

Tom: What's the underlying?

Tony: Stocks, got it.

Tom: Hey guys, what's the underlying on this one?

Tony: Give me a minute.

Tom: I think we just forgot to put the underlying, I want to make it all clear.

Tony: TLT IWM SPY.

Tom: OK, those three?

Tony: So far that's what I'm being told, yep.

Tom: OK-

Tony: Those three.

Tom: TLT, IWM, and SPY. You guys have to add that to this. Linda, please add that so we have that. TLT, IWM, and SPY. OK, so 117 occurrences of IVR over 50, and these are the results: a 7% wins, expected wins, blah blah blah, average IV rank of 69. Now we're going to observe the results by looking at occurrences of IV rank between 50 and 74, and then 75 and 100, to make the case why it's so important, Tony, for us to do this if it's…

Tony: Because those are-

Tom: When we're pinned.

Tony: Right.

Tom: Here's the portfolio, here's the IV rank with 50-74, and here's the IV rank with 75-100, and as you can see right now, you have to do it no matter what. You don't get this. At 88 versus 61 you make more money per trade, and there is way fewer trades. You have to do it in both cases, but when IV rank's really high you make the same amount of money for half as many trades.

Tony: Right, so there you hit on it on the head. The PNL is basically exactly the same, but the number of occurrences is half as much, you said it perfectly.

Tom: Right, 36 versus 81 occurrences, your win rate's slightly higher, 89 versus 86, which doesn't matter. The expected win in both cases is 68, because the 16 16, 32 minus 100 is 68, and your PNL per trade is so much higher when your IV rank is higher. Now it doesn't mean you don't do it at 61, but it means that you are very aggressive at 88. Let me go back, just because again, if you're new, whatever it is, here's the study: from 2005 to present we took every high IV rank occurrence in three different underlyings which we add to this. SPY, IWM-

Tony: And TL2, which are bonds.

Tom: And TL2, which is bonds. So there's a little bit, SPY and IWM are correlated underlyings.

Tony: TLT is it's own animal, this-

Tom: No clue.

Tony: Throughout this study from '05 to '14.

Tom: No clue what TL2 is correlated to anymore, could be correlated to beans for all I know.

Tony: Right.

Tom: It's the first trading day of the month, it's 45 days to expiration with an IV rank of above 50, one standard deviation strain held to expiration, and again, when we put the whole package together it was $6,500 of winners. 117 different occurrences, 87% wins on a 68% expected win. Now what's interesting about this, so yesterday I told I met with a friend, he's a floor trader, and we were talking about the business and stuff. I said to him, I go, he "I don't understand," and it was a legit question, it was like "I don't understand [crosstalk 10:08]"

Tony: What your IV rank is all about?

Tom: "How the retail investor makes money. I don't get the whole game. What is their game?" I go, "Well the game is that the expected wins in most cases, if you do something like one standard deviation away," and this guy's a very smart math mind, OK? I said "If you're one standard deviation away, the expected win is 68%" He goes "OK, fine. I still don't understand the game." I go, "Well because the actual number of wins can be as high as 78-88, and here because you're using some pretty big diversified products, you're at 87%" He's like, "I didn't realize it was that high," and I go "That's Implied Vol-"

Tony: Because you'd love to do things that are 87% wins.

Tom: I go, "That's Implied Volatility to actual." I go, "But you know, that's what you do all day long," and he's like "Yeah I know that's what we do, I just never actually knew the actual statistics." I go, "Well that's what they are," and I go, "and that's the way you trade," and he goes "Yeah, that is the way they trade." It's so funny, because when you put the actual statistics in front of him, he goes "I didn't realize it was that big an edge, because I always thought our edge was just a few percentage points. I didn't realize it was that big." I go, "Well it depends on what you're doing. If you go then and you break it down between 50 and 74, and 75 to 100, then you're talking about 86 and 89% just broken down, that's why I came up with 87 or 88 before as combined. When you start to look at these numbers, the case is made here, bet."

Tony: 100%!

Tom: This is the strongest case that anybody's ever going to present to you for selling high IV blindly.

Tony: Agreed!

Tom: High IV rank.

Tony: Correct.

Tom: Not just high IV, it has to be IV rank. You can have implied volatility, but this-

Tony: Now that's monthly implied. OK, go ahead.

Tom: You can have the VIX go to 30, and if it stays there for a while you're going to be looking at 30 VICs with really low IV rank. Stocks are going to [crosstalk 12:00] measure against themselves.

Tony: Need some time to catch up, right.

Tom: They're going to catch up.

Tony: Mm-hm (affirmative)

Tom: So it doesn't necessarily mean just because Implied Volatility is high IV rank's going to be high. It will be initially, and then it will all normalize.

Tony: The reverse can be said: an IV rank of 100 in a stock's monthly IV right now of 30 might not be 100 anymore, it might be 50% or lower.

Tom: That's exactly right.

Tony: With the IV rank being 40.

Tom: That's exactly right, but when you start to look at this stuff man, this is the stuff that's really, really powerful, because it resonates, it sticks with you, and then when you combine this with the managing winners piece and you combine this with understanding how these underlyings have to be non-correlated, it's extremely powerful.

Tony: Very good, good job. Come back at the top of the our, we'll talk about trade of the week. You're listening to tastylive Live!