Can You Trade Options In Low IV?

let's do this I got a really fun segment for you today it's a little complex if we have to bring in the boys like this I thought I think we'll be okay though mmm okay with it yeah let's go down under do it in a low V environments short premium strategies outperform their expected probabilities as IV over States realized volatility uh-huh in low implied volatile environments short premium strategies outperform their expected probabilities because implied volatility over States realized volatility that's the whole reason for our the bane of our existence as they say correct so so our intent is to search out opportunity based on high IV where it's over states kind of what the actual move is going to be and over time that tends to work and work very well doesn't work every year doesn't work every trade but over time that tends to work very well given that implied volatility that low implied volatility still beats expected probabilities can we consider selling premium under certain criteria because we took all the time about selling implied volatility when it's high but people has a no brainer right of course so we saw yesterday you could be right you know whatever you can be right 30 out of 30 times or 35 out of 32 if you sell something when when the rank is around 100 it there's nowhere for it to go right I mean it doesn't mean you're guaranteed to make money just means that hey you know what you have a decent statistical chance but what about in periods of low implied volatility can you still beat the expected or the real I the actual movement because this implied volatility still richer than the actual movement can we consider selling premium under certain criteria now most people don't get this right most people even really when I say most people I mean really smart most people don't get this at all there was a one of our listeners just sent us a tweet by Bill Gross can you put up that Bill Gross tweet for a second Linda sure I just want the top one okay I mean if I wanted all the other strangers up there I would ask for it yeah like I just get that top one blown up so people can see it but you don't have it I'm sorry I'm sorry so anyway I'll read it to you so Bill Gross said when markets aren't volatile sell volatility you know I get undistorted when markets aren't volatile sell volatility next week's Fed number will reinforce attempt to stay the course of low vol I guess the second line I couldn't care less the first line is critical when markets aren't volatile cell volatility take it down this is Bill Gross he manages a couple of hundred billion dollars not million delivery but a trillion dollars right and he's absolutely bone dead clueless when volatility he essentially suggest that you should sell low volatility there's not a single shred of statistical evidence that shows that you should ever sell low volatility it is such a classic public idiotic statement and for somebody who manages hundreds of billions of dollars not to understand the very essence of opportunity as it relates to as it relates to volatility really bothers me he's try and he's also trying to say that the best time to do it is when Malia slaughters me okay because that means you just don't understand the simplest of hey what's an opportunity instead it's just it drives me bananas how somebody can manage a quarter of a trillion dollars and eat it's one thing if you don't know it just shut up correct like if you're clueless if you really don't understand the domain just shut up but don't go out and start tweeting things like you know what when volatility is cheap that's when you sell it when there's less risk oh my god it's scary it's really scary anyway we're gonna put some stuff up here that's really going to intrigue you and it's also going to go and and show you kind of to what level even if it starts to get cheap to what level can you even consider it and let me tell you why we made a lot of these mistakes throughout the years we would sell volatility when it's way too cheap because we just didn't spend enough time to learn the domain we just like period right I mean you would sell no matter what hey close your eyes so know what and end to this day will never buy it it's correct we'll never buy it but we will continue to sell it you know but but we've we've tweaked it now we're very careful to which is why our positions are a little smaller a little less whatever it is but let's take the liberty to do that too right because now we're making our own trades as opposed to taking the other side courses coming of course so five years of data spy GLD e w WG e G LG's twice up there TLT and IWM they get I think it's actually five different underlines just take the one GLD off there is cyber underlines there is a one standard deviation strangle 45 days to go to expiration we mechanically sold in the first day of the month we managed to 50% helped to expiration but here's the difference now we are bucketing we're bucketing by IV rank of 0 to 24 an IV rank of 25 to 49 these are things that we've never shown you before on the show we're always done IV rank from 50 to let's say 80 and over 80 because we know we validated it 800 ways that that high IV gives you the best opportunity to outperform um to outperform actual volatility there's a there is an embedded edge in high implied volatility over actual so implied over realized there's a huge edge when implied volatility is really high but what about when implied volatility is really low and what about this statement that gross made which would be when volatility is low which is 0 to 24 that you have opportunity that's correct so what we did was we looked at all in IV ranked below 50 and we said hey if you took every single number from 50 to zero would it still be a viable strategy and the answer is yes mm-hmm so if you sell now again we're gonna quantify this a lot more but does selling premium even even when it's not a best case still work correct and this is at a 1 standard deviation so the numbers should be wrapped around that 85% numbers are that's right so so no in this case it should be let's check this it should be 68 I believe it should be 68 point - I'll check it out let's check it out I believe it should be where six let's say 68 69 it should be that range but we'll check it out for you anyway my point is 89% winners managed to 50% 80% winners held to expiration their takeaway from this is that you never buy volatility no matter what you think you never buy volatility the takeaways clear as day correct you never buy volatility period the second thing this take away from this is that there is you know no matter what you manage prior to expiration I know the numbers here were bigger at expiration but you managed prior to expiration because the win rates higher and the the P&L per day is higher it's just an amount of time you hold something is is half so you have to do all that hang on Tony we're just going to put an order in he may have some previous trade in 1840 and a half yeah or just put an order item going and working before anyway so so those are really cool really key takeaways but let's take it to the next level so IV rank between 0 and 24 now the reason I put up that Bill Gross quote was because this is exactly what he's talking about here there was 135 occurrences in the last three years Oh wit with the five largest ETFs mm-hmm they're 89% wins you can pull up 89% wins because this strategy works the problem is your P&L was negative correct there's no money to be made so when volatility is at its lowest at its extremes suggesting to sell premium would be completely wrong suggesting to sell volatility is completely wrong flat-out it does not outperform realize under pearlized outperforms implied and it should you know what there are certain levels where you got to be held accountable for taking dumb risk this is dumb risk but if what fascinates me is that people with trillions of dollars are I'm sorry hundreds of millions of dollars under management can't spend the few you know tens of thousands of dollars it takes to research this stuff it's correct 0:24 IV rank you do not sell good live volatility and you're right each leg was at eighty four percent so you're looking you're looking at right sixty eight percent so so the coolest thing here is no matter what and remember yesterday i talked about hey what we're doing is we're teaching people we got that whole teaching people to fish thing going on our brains but just got filled at eighteen forty eighteen forty okay good we're done with forty-three I sold him at eighteen forty three even correct yeah what do we use just after that how does daddy do it who wears captain's hat if you love that don't you who would have thought three years ago yelling speaker cross me John you'd one day say hey bat what do we say after that and the balancing how is daddy doing well they must have some great pictures man yeah but I'm with him something I bought that from Jules in 1985 that like anyway so so getting back to that to the gross thing because he's not alone he's not alone he's not alone in he's not alone at being one of the kind of industry icons that has no idea was talking about mmm-hmm that's all I want to say it's so it's so important to recognize that because you as an individual investor have to understand that you're as smart when it comes to domain skill as anybody else out there you have to understand that if you're sitting or if you're sitting in your condo in Florida or your house in Arizona okay or you're in the mountains in Lake Tahoe I don't care where you are or you're in some country anywhere in the world I don't care where you are just as skilled and you have just the same if not greater domain skill than the people that are managing hundreds and hundreds of billions of dollars and you understand it better and you can actually articulate it now the next thing is you also understand that you can create 89% winners 120 out of 135 and not make any money mm-hmm or 106 out of 135 and not 79% winners on a 68 percent probability of of success and still not come out ahead that's correct becomes incredibly frustrating if you don't understand why correct and so this is the reason why because you didn't give you get paid enough in the front end the thing that you can control which is the opening trade the numbers worked but the items that informed the numbers worked they work better than they're supposed to right but that's probably because it's a bull market everything else but you didn't everything work because volatility kept contracting everything worked but you didn't make money not relevant here hmm the takeaway from this is you can't sell low IV rank whatever our definition of low IV rank is you can't sell it correct using our definition you cancel and as our definition gets better we'll all be better as in other words as the research behind the definition gets better and as we start to tweak kind of the outliers we will end up with probably even even I don't say more accurate because I'm not sure that that's even fair because I don't even know if you can move I don't even know if you can take away the outliers but at least we'll have choices where we find well we'll have choices printed that way on the last slide we're looking at I'd be ranked between 25 and 49 percent now this is a little different because we found here is the numbers go up dramatically to 90 percent and 82 percent as far as winners go but if you manage your winners at 50 percent you end up with 3200 hours in profits if you manage a hold to expiration it's 5300 so just a very subtle change between 0 and 24 and then 25 to 50 25 to 50 means that if something if you want to sell some premium Tony in something that's trading around let's say 43% IV rank you can do it sure I mean ideally you'd like to wait for higher but if there's nothing else out there statistically it's okay correct it's not as rich as it would be obviously the higher the IV rank the better the opportunity to could start you know lowering your size a little bit on entry yeah this is this is absolutely groundbreaking stuff okay there's no about it nobody else has ever researched this sure as opposed to just making a statement that's right and I hate for that reason I hate those guys like the Bill Gross well I can't stand them I've never met the guy I probably nicest guy in the world okay I can't stand them because they make idiotic comments that take down the consumer nothing they do is really for the consumers benefit it's all about their own personal PR just do the research man you can afford five guys I'll sell your five guys maybe but there's a number ok mr. Jefferson okay got it let them say it is you know what it's not that hard figuring out low Ivy between zero and 24% rank or 25% rank you cannot make money understood ok 0 25 to 50% that barely turns into sweet I can't sell what you don't own those are my guys really yeah you want to make them choose one of them's yours and you're and you're right I couldn't sell that one little bit you

Channel: tastytrade

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Id: UbqyIjDYGqI

Length: 14min 32sec (872 seconds)

Published: Fri Mar 14 2014