Managing Trades in IV Drops and Peaks

Overview

• Discussed managing trades in different Implied Volatility (IV) environments.
• Focus on managing Delta of short strangles.
• Consideration of market changes and implication on trading strategies.

Key Concepts

• IV Peaks and Troughs: Adjust strategies when IV is exceptionally high or low.
• Implied Volatility (IV): Significant decline in 2023, remained stable in 2024 (~15%).

Time Period Analysis

2016-2018

• Market Environment: Low implied volatility, VIX averaged ~14%.
• Trading Strategy: Selling 25, 16, 25, and 35 Delta strangles, managed at 21 days.
• Observations:
  • High win rate (~72-75%), but low average P&L.
  • Risk-return imbalance: High risk for low returns (8% return on capital).
  • Widening Delta strikes can increase profits, but higher premiums often lead to insufficient compensation for risks.

2020-2024

• Market Environment: Initially high IV, with VIX dropping from 40% to 25% and averaging 15% by 2024.
• Trading Strategy: Similar Delta strangle strategy with higher premiums.
• Observations:
  • Stable win rate, but higher premium collection (over double).
  • Return on capital significantly increased (up to 51%).
  • High IV offers opportunities for higher profitability.
  • Selling larger Delta strangles improves performance.

Key Insights

• Low IV Environment:
  • Requires caution and hard work.
  • Returns on capital are less favorable.
• High IV Environment:
  • Offers better wealth creation opportunities.
  • Higher Premiums with improved return on capital.
  • Taking more risk can be beneficial when opportunities arise.

Takeaways

• Adjust short premium positions based on IV changes to stabilize risk exposure.
• High IV allows for higher Delta strangle profitability, while low IV doesn't favor high Delta trades.
• Alteration in IV impacts risk-return profile of trades.

Conclusion

• Managing trade strategies effectively in different IV conditions is crucial for optimizing performance and risk management.
• Higher IV environments offer substantial opportunities, while low IV periods require more cautious trading strategies.