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We generally use either Implied Volatility Rank (IVR) or IV Percentile (IVP) to signal when Implied Volatility (IV) in an underlying is at a high level and is ripe for selling premium. The Market Measures from June 1, 2016, "How Often Does High IV Occur?" compared IVR and IVP to see how often certain underlyings exhibited high levels of either metric and then how long those levels remained high. The bottom line though is how much money we make and how much risk do we have to take. What can we learn about IVR and IVP that help us with our bottom line? We used some of the visualization tools used in Data Science to help display the differences.
Our study was conducted in the SPX (S&P 500 Index) and RUT (Russell 2000 Index) using data from 2005 to the present and also GLD (Gold ETF) using data from 2009 to the present. We collected data every 5 days for occurrences. We sold the 1 Standard Deviation (SD) 16 Delta Strangles in each of the underlyings and compared high IVR results to high IV Percentile results.
A graph of the short Strangle P/L at different levels of IVR and IVP in the SPX was displayed. The graph showed that although there were fewer occurrences of high IVR, waiting for high IVR increased the average P/L and avoided some large losses. A graph of the short Strangle P/L at different levels of IVR and IVP in the RUT was similar to that of the SPX with much better average P/Ls in high IVR. The graph of the results for GLD showed a significant decrease in number of large losses when IVR and IVP was high.
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the key takeaways and to see how the visualization techniques of Data Science can lead to a better understanding of the differences in using IVR or IVP as a metric for when IV is high enough to sell.
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