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Research Specials LIVE

IV Contraction

Research Specials LIVE

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

At tastytrade, most of our trades are based on selling implied volatility when it is high, and hope it goes down throughout the course of the trade. Why is it a logically sound bet for IV to decrease? Answer: IV tends to be mean reverting.

How much does implied volatility go down when IV Rank is at a certain level?

  • SPY, 2005-present
  • Measured IV and IV Rank over a 45-day period
  • Recorded the average 45-day movement in IV (as measured by VIX) based on initial levels of IV Rank
    • IVR < 10, between 10 and 20, 20 and 30, 30 and 40, 40 and 50, and above 50

We find that when IV Rank is below 30, IV tends to move against us in a 45 day period. When IVR is above 30, we tend to benefit from IV contraction throughout the trade.

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