The Skinny On Options Modeling

P/L Context For IV Reversion

The Skinny On Options Modeling

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Whether IV is high or low, a 1% change in IV will have the same impact on a short premium strategy. Why are we focused on putting on short premium in High IV then?

The reason that a 1% change in implied volatility has the same impact no matter the level of IV is because gamma is mostly constant over a range of IVs, but varies due to expiration and underlying price. Although the P/L is the same regardless of IV level, the higher the IV, the higher the Standard Deviation. This means that the likelihood of a 1% reversion is greater when IV is higher.

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