It’s been awhile since the VIX has traded consistently above 20, but October 2018 saw 12 such days.

If you haven’t traded in such environments in the past, or can’t remember the last time you did, it can be a good idea to reset your trading expectations, and possibly even adjust your tactics.

In this spirit, a recent episode of Market Measures is undoubtedly worth a few moments of your time.

The focus of this episode is the impact of heightened volatility on P/L, and a review of the data presented on this show may help traders set appropriate expectations for trading in faster markets, as well as aid in position/ portfolio management.

The show begins with a discussion around rising volatility, and why premium sellers often view this type of environment as an opportunity to deploy high probability exposures.

The hosts then move on to discuss how heightened volatility environments can affect the P/L in our portfolios. Specifically, the Market Measures team seeks to better understand if our potential to make profit increases - along with the heightened risks.

In order to produce the data necessary to answer this question, the team devised a study which analyzes the historical performance of short strangles in SPY (using data from 2005 to present). The data is parsed such that varying trading environments can be compared.

In the study, Implied Volatility Rank (IV Rank) is used to segment the spectrum of trading environments - for example, low IVR environments, mid-range IVR environments, and high IVR environments.

As a reminder, IV Rank tells us whether implied volatility is high or low for a specific underlying based on the last 52-weeks of data. An IV Rank of 100% means that implied volatility is equal to the highest levels observed over the last 52 weeks, while an IV Rank of zero would mean implied volatility is equal to the lowest levels observed over the last 52 weeks.

As you can see in the table below, the P/L of short strangles performed better for trades that were deployed when IV Rank was above 50% (i.e. high IVR environments), and maintained a strong success rate:

The Impact of Volatility on P/L

While the above data is compelling, the second part of the analysis adds valuable context to the findings.

In the second half of Market Measures the hosts discuss another important factor related to P/L when volatility increases. Specifically, they reveal additional data from the same study that illustrates how the standard deviation of our P/L also increases when volatility increases.

Logically, this makes perfect sense because a faster moving market typically translates to increased movement in underlying symbols - pretty much across the board. The key takeaway is that if traders are going to deploy positions during periods of heightened volatility, they need to first accept the notion that the standard deviation in their P/L will also increase.

By choosing to take risk in a fast-moving market, traders basically need to remain committed to mechanical management of positions, even in the face of a portfolio P/L that is making bigger swings than usual.

That means if you aren’t willing to accept more pronounced swings in your P/L, then trading in these types of markets may not be recommended.

For further clarification on this topic we hope you’ll take the time to review the complete episode of Market Measures focusing on “the impact of heightened volatility” when your schedule allows.

If you have any outstanding questions or feedback, please don’t hesitate to leave a message in the space below, or reach out directly at support@tastytrade.com.

We look forward to hearing from you!


Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.


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