Today on this segment of "Market Measures", Tom Sosnoff and Tony Battista examine buying premium when IV Rank is low (below 25%).
In periods of low market implied volatility some say that traders should buy premium (i.e. buy options). This is not the tastylive way. Why does buying premium in a low IV Rank environment generally not work?
The first study tested buying at-the-money straddles in several stocks when the implied volatility rank (IVR) was below 25%.
The study tested exiting positions at three points: 1) at expiration 2) when the position increased by 25% and 3) when the position increased by 50%
The second study, for thoroughness, tested buying at-the-money straddles without regard to implied volatility rank.
The study tested exiting positions at two points: 1) at expiration 2) when the position increased by 25%
Takeaways:
We did not find a profitable scenario for buying straddles in a low implied volatility environment with multiple management strategies.
When we took the implied volatility component out, which increased occurrences, we found that long straddles were also not profitable, even with a pre-determined exit strategy.
Watch this segment of "Market Measures" with Tom Sosnoff and Tony Battista to find out why, when it comes to buying and selling premium, the tastylive way is the best.
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