We haven’t been employing many of our High Implied Volatility Strategies such as selling premium using Strangles and Straddles because Implied Volatility (IV), IV Rank (IVR) and IV percentile are all at low levels in the equities and their indices. One exception has been in the currencies and the currency ETFs such as the FXE (Euro) and FXY (Yen). How often is IV at elevated levels in FXE and FXY and how do strategies of selling Strangles and Straddles perform?
Our study was conducted in the FXE and its volatility index EUVIX and the Yen and its volatility index JYVIX using data from from 2008 to the present. We noted how often and how long these currencies were in high IV Rank and IV Percentile. We then backtested selling 16 Delta Strangles and also Straddles using the expiration closest to 45 days to expiration (DTE).
A results table displayed the percentage of time the Euro and the Yen were over 50 IVR and IVP. The table included the average number of consecutive days over 50 IVR and IVP. The table showed that the Euro is historically more volatile than the Yen, staying above 50% IVR and IVP longer and more often. Tom and Tony also noted how there is some fast volatility contraction which provides opportunity for profits.
A table comparing selling 16 Delta Strangles in the FXE and the FXY managed at 50% of max profit (if possible) or held to expiration was displayed. The table included the win rate, top 25% P/L, median P/L, bottom 25% P/L and largest loss. The table showed that selling Strangles on the more volatile Euro performed better historically, but came with a more significant largest loss. A second table compared selling 16 Delta Strangles in the FXE and the FXY managed at 50% of max profit (if possible) in all IVR environments versus only high IVR. Similar tables provided the information for the Straddles. The data results were clear.
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and the detailed results of our study comparing Short Straddles and Strangles in the Currency ETFs and how managing winners and waiting for high IVR impacts the results.
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