Market Measures

Patience During Rising IVR

| Nov 15, 2016
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    Market Measures

    Patience During Rising IVR

    Nov 15, 2016

    Our most used phrase on tastylive is “trade small, trade often”. A phrase that is related to that that we often use is to “keep some powder dry”. The application is to be patient in using your capital so you can sell premium when the trading opportunities are at their best, mainly when Implied Volatility (IV) is high. It can be difficult to wait for a high IV and IV Rank (IVR) environment. Traders can easily be tempted to settle for lower IV Rank trades in stock index Futures and ETFs because they have had lower IV in general over the last several years. We believe patience in waiting for IVR will be rewarded with higher profits and less risk as measured by the Standard Deviation (SD) of returns. What did our study show?

    Our study was conducted in the SPY (S&P 500 ETF) using data from 2005 to the present. We chose the option expiration cycle closest to 45 Days To Expiration (DTE). We sold short Strangles comprised of a short 30 Delta Call and a short 30 Delta Put. We then compared the results for our short Strangles when IVR was between 30-50 versus when IVR was above 50. A table showed that currently, for IV Rank to be above 30 Implied Volatility would need to be above 16 and for IV Rank to be above 50 Implied Volatility would need to be above 21.

    A table of the results comparing SPY Strangles entered with a 30-50 IVR as compared with Strangles with an IVR above 50 was displayed. The table included the number of occurrences, average credit, success rate, average P/L and average days in the trade. As expected, waiting for higher IVR was beneficial to all trade metrics. The average credit received and the average P/L raised by 20%. A final table compared the occurrences and the cumulative P/L on the SPY Strangles. The table showed that the profit on trades with IVR above 50 is roughly 10% more than the trades with IVR between 30 and 50 even though there are nearly 10% fewer occurrences.

    Tom acknowledged that “In a smaller account it is hard to keep some powder dry. Larger accounts can be more linear with respect to where they can go to and when they can get there because they have more available capital”

    For more information on IV Rank see:

    Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and the results of our study showing the importance of “keeping some powder dry” and having patience during a rising IV Rank environment.

    This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

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