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IV Overstatement vs. IV Drop

Market Measures

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Implied volatility overstatement and implied volatility drop can be esoteric concepts to understand, so today we are going to compare the two to concepts that we can understand: risk and return.

IV overstatement is best used as a measure of risk for your position. The higher the IV, the lower the overstatement, the higher the risk, and vice versa.

IV drop is best used as a measure of reward. The higher the IV, the larger the drop in IV, the higher the P/L historically, and vice versa.

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