High implied volatility (IV) and implied volatility rank (IVR) allow us to sell premium and utilize High Implied Volatility Strategies. What do we do when IV is low?
A table of the frequency the VIX trades below 15, above 20 and above 25 was displayed. The table included the timeline of 2005 to present and 2013 to present. The table showed that in the last 3 years, the VIX spent 11% of the time above 20 and 3% of the time above 25. Do we trade only when the VIX is high and do nothing the rest of the time?
A study was conducted in SPY (S&P 500 ETF) from 2005 to present. We sold 1 Standard Deviation Strangles and compared selling strangles only when the VIX was above 25 and held to expiration. We also tested selling strangles in all volatility environments and managed them at 50% of max profit (if possible). Any position that wasn't able to be managed at 50% of max profit was held to expiration.
A table displayed the results for the three different scenarios: VIX above 25 with trades held to expiration, VIX above 25 with trades managed at 50% of max profit and all volatility environments with trades managed at 50% of max profit. The results for probability of profit (POP), daily P/L and daily return on capital (ROC) for the 3 categories was revealed.
For more info on trading in low IV environments see:
Watch this segment of “Market Measures with Tom Sosnoff and Tony Battista see how managing winners helps us stay engaged and how doing so helps us trade in all IV environments.
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