We are currently experiencing a period of low Implied Volatility (IV). We are convinced in the idea that IV is a mean reverting number and if it is too low it will eventually rise and if it is too high it will eventually fall. A table was displayed which demonstrated how the last few years the VIX has been lower than its historical experience. In the last 3 years the VIX has spent 60% of its time below 15. We are convinced that high volatility will revert but the reality is that it is now low. Should we use our regular premium selling strategies, such as a short Straddle in these conditions? Do we wait for high IV or do we maximize our number of occurrences?
Our study was conducted in the SPY (S&P 500 ETF) from 2005 to the present. We sold the at-the-money (ATM) Straddles using options closest to 45 days to expiration (DTE). We managed positions at 25% of the credit received if possible or held the trade to expiration. We broke down the results for all IV Rank (IVR) environments, low levels of 0-24%, mid of 25-49% and high which was above 50%.
The results were broken down in the four IVR environments in two separate tables. The first table listed the win rate, Daily P/L, percentage of occurrences and the average loser. The second table noted the average IVR change over the life of the trade and the percent that IVR increased after 45 days. P/L was greatest when IV is high, but that category had the fewest amount of occurrences. The highest Vega risk from volatility expansion is in the low IV category. We monitor our size and our strategies closely to reflect the different market environments.
For more information on Selling Premium In Low Volatility Environments see:
Market Measures from April 4, 2016: "Staying Active When IV is Low"
Market Measures from April 15, 2016: "Selling Premium in Low IV?"
Best Practices from May 9, 2016: "Top 3 Strategies for Today's Volatility Environment"
Watch this segment of Options Jive with Tom Sosnoff and Tony Battista for the key takeaways and the results of our study on selling Straddles in different implied volatility environments.
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