Using IV Rank To Trade Strangles

you put together with the team today something called blended strangle can I be ranked assist us in choosing which probability to initiate short premium trays so one of the things we've been doing is we've been consistently defining and then redefining fine-tuning is probably the best word bet of some of the things that we like to look for the reason we keep doing this Allen also is because ultimately we want to find out what what we think is the most important feature set to queue up and build into dough yep so one of the reasons we're building dough and a lot of people say well those confusing to me because it doesn't make as much you know it doesn't do this or it doesn't do this because we're not a brokerage firm so we want to build features that can alt that a year from now will allow you to use a platform that completely differentiates itself from any other platform we're not trying to reinvent the wheel we want to look at a platform where the first thing you do is say hey I'm gonna trade Google today or on trading Google right now what is the perfect percent of max profit to exit at what is the perfect price - what is the perfect IV rank to enter it sure and then keep doing that and one of the reasons you do this stuff is so that we can keep finding out where everybody's no interest lies right keep posting one bubble of it is there merit to being more aggressive with strike selection in periods of high IV rank and more conservative when IB rank is low what do you think that is their merit to being more aggressive with strike selection in periods of IV rank or more conservative which on that strike selection only at this point I mean if IV rank is high from a lot of the research that we've done I've got to assume that it's gonna work out that you should be coming close to the money with high IV so so one system so what we've learned over the and we're just guessing right now so what we're guessing on Allen is that based on all the research you guys please all the research you guys have done to this point it says essentially users scale we should scale into strength this trader so when IV rank starts to get higher we should be more aggressive which means tight tightening this tightening the screws not widening them mm-hmm it means we should be less aggressive when there's less opportunity and more aggressive when there's more opportunity because that would go against comment that would go against the way the common man they would retail traders await niches which is take less risk when there's more risk absolutely okay so I'm guessing that what's the purpose behind the store shirt and also for those that want to be in the market all the time they you know they don't want to wait for a period of five II can I always be in the market and then how do I determine my strikes accordingly hmm now this study SPX five years 45 days to expiration sold sorry the first of the month sold a strangle of one standard deviation one a half standard deviations and two standard deviations that's to determine your strike width yep mechanical three different strangles now how does your team Alan every single day day cuz you come up with content every day it takes like five or six guys there are five or six people to come up with you know 15 30 minutes of which is crazy yeah but how do you choose like one day SPX one day you know IWM or multiple that you like how do you guys like what what do you determine is that for instance curve fit no for sure and for instance when we go up to two standard deviation we need a product that has you know the premium out there so in this case we need a bigger index and so we couldn't do this with like Cisco or Intel exactly beautiful so when come when we then compared the results of trading these three strangles to a blended version it consisted of trading the two standard deviations triangular low IP the one and a half standard deviations strangle in mid IP and the one standard deviation strangle in high Ivy the next slide we'll break it down okay let's go so here the blend is trying to use 0 to 24 IV rank the trade implemented the two standard deviations strangle there's 39 occurrences 25 to 49 the one and a half 14 occurrences and plus 50 was the one standard deviation strangle with four with seven occurrences you need to be aware of that IV most of the time lies lower than you would think particularly in the last five years yeah right up because we've been in a bull market absolutely so here's so this is the blend of strategies 160 occurrences we did this every month compared to the other five times twelve correct okay that's 12 12 so you just you didn't use them to every single month for five years which is sixty occurrences right and it broke down 39 14 and seven exactly so we did this every time depend on where the IV rank was we did a two standard deviation if it was low 25 to 49 we did the one and a half and if is about 50 we did the seven so every every every month and put on the trade and this is dependent of where we okay we then plotted a running P&L graph comparing all four strategies let's take a look so walk us through this for a second the blue line is the one standard deviation strangle the Green Line at the bottom is the two standard deviation strangle and then we looked at the blended and then of course the red line in the middle is the one and a half the takeaway from this was was exactly what Tony said earlier was that the reward came in the hands of being aggressive when you had that opportunity sure this is going to blow that common-man thinking this is gonna blow that bill gross hey cell volatility when it's contracting not when it's expanding it blows it away because it's so idiotic because there's no proof of that whatsoever I'd love to see the vs I think sure right yeah another key takeaway here though notice the purple line that's the blended one little thicker it ends up almost being the same P and L wise from the one and a half but you don't have the big bigger drawdowns that you see early on with the one standard deviation one and a half so it tends to smooth out a little bit by being more conservative during low IV so I mean there may be some case there it's a very high will go into the 20s so but just from a straight profit standpoint very comparable to the one and a half just doing the one half standard mechanically did this surprise you it did mm-hmm yep I thought it'd even smooth it out even more and there might be more benefit to doing the blended so this really this this right shoe in the sense that you had to be aggressive you essentially had to ramp up and be aggressive if you were you had to ramp up and be aggressive to take advantage of kind of this being this is a really P&L why sure kind of a huge diversion from what we thought right and be aggressive throughout the entire study obviously paid off next we compare the results by PL and return on capital and the win rate of each strategy so let's take a look so here we have the on the top line 30 mm this is PL twenty two thousand eleven thousand and then blended twenty one thousand what we see is again if you look at the average buying power reduction and you can see that there's not that big a difference and and you're just putting slide down number six that we just had up there a moment ago kind of drawn to a different format at the two standard deviation level you went sixty four sixty right now that's Karen right that's good that's Karen that's Karen like you don't you didn't take some people go how did she do it over the last five years well hey at that to standard deviation level that's how you did it you didn't take any heat which is a gift and let me tell you there's going to be times when you have to take eat there but if you look at the blended rate and you just look at kind of you know the return on capital this is the strategy works no matter what you did you should be a blind monkey you wouldn't worked but when you start to look at the ramp up I mean I think this is the I think this is a very important towel yep for the whole for just for the concept of hey if there's opportunity ramp up absolutely was there another takeaway that I missed no I mean from the blended standpoint you only have one loss and early early drawdown at the beginning of the study but then otherwise I mean you still get a 98 percent win rate and in double your to standard deviation P&L so the a case can be made there to during periods of low IV to get wider during high V to go down to the one stand deviation so a case can be made there you almost double your your rock compared to the two standard deviation so there's there there is a case two strikes election during that period but otherwise consistently being aggressive pays the most so these on the first a month this is no man like that very mechanical writen this is a this is an awesome this is an awesome study because soul don't say so just because I'm getting a bunch of questions sure so it's it's something like um and I'll paraphrase here so wouldn't you want to go wider during high IV to take advantage of more risk and using more cap but wouldn't wider be more aggressive well this is what we thought this is why we did this study and what we found is the same reason for the same reason that we suggest scaling into strengths because we've done studies in the past which essentially say if he did something when IV was high and then it went higher you would be more aggressive and that's not we you know we generally wouldn't do that but our studies show that makes sense now what we're saying is it actually means so so you were saying that if the volatility is high I could when volatility was lower I was selling a strangle here Forex with volatile he's high and maybe we'll sell it further out for the same X and that was taking advantage of the high out is what turns out is if you actually keep the strike selection right we would let her collect more collect more premium that's being more aggressive so there wasn't this correlation between getting wider and getting smarter right there wasn't that's very interesting mm-hmm absolute job out of you guys

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Id: _fENqr9vA8A

Length: 10min 25sec (625 seconds)

Published: Mon Mar 24 2014