High IV: Strategy Analysis

When volatility expands in the market, there are multiple short premium strategies that we may implement to capture high Implied Volatility (IV) trade opportunities. How do these various strategies compare to one and other?

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High IV: Strategy Analysis

Various high IV strategies include: !  Straddle !  Strangle !  Jade Lizard !  Iron Condor !  Iron Fly !  Broken Wing Butterfly

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High IV: Strategy Analysis

Today we will conduct an analysis of these varying strategies. Specifically we will be comparing their basic set-up, their risk profile and how they differ with respect to percentage return on capital (ROC). First, we will look at a Strangle and its defined counterpart, an Iron Condor.

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High IV: Strategy Analysis

The Study: !  2009 - Present, IV Rank above 50 !  SPY, IWM, EWW, GLD, TLT !  Placed the following trades

!   1 Standard Deviation Strangle !   5pt Wide Iron Condor (Same shorts as

Strangle) !   2pt Wide Chicken Iron Condor

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High IV: Strategy Analysis

   

Here we see the set up for a 1 SD strangle, where each strike is placed at 84% out of the money (OTM). 5 of 15

High IV: Strategy Analysis

   

An example of a 5 point wide iron condor, with short strikes placed at 1 standard deviation (1SD). 6 of 15

High IV: Strategy Analysis

   

A  Chicken  IC  is  an  aggressive  IC  strategy  that  looks  to  collect  a  credit  roughly  ½    the  widths  of  the  strikes.  Here  the  widths  of  the  strikes  are  $2  wide  and  we  collect  $1.   7 of 15

High IV: Strategy Analysis

Portfolio 1 SD Strangle 5pt Wide IC 2pt Wide CIC

P/L $4,701 $1,888 $524 # of Wins 70/75 69/75 40/75 % of Wins 93% 92% 53%

Avg. Credit $0.89 $0.50 $1.01 Avg. ROC 5.70% 5.64% 7.38%

Biggest Loss -$556 -$462 -$108

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High IV: Strategy Analysis

Next we look at the other short premium strategies that will take advantage of high IV Rank.

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High IV: Strategy Analysis

The Study: !  2009 - Present, IV Rank above 50 !  SPY, IWM, EWW, GLD, TLT !  Placed the following trades

!   Jade Lizard (1pt Wide Call Spread, Short at 84% OTM)

!   Broken Wing Butterfly (4 x 3) !   ATM Straddle !   10pt Wide Iron Fly

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High IV: Strategy Analysis

   

A Jade Lizard takes advantage of volatility skew, combining a short call spread with a short put. The total credit is greater than the width of the call spread so it eliminates risk to the upside. 11 of 15

High IV: Strategy Analysis

   

Here we see a broken wing butterfly skewed to the call side (3 strikes wide on put, 4 strikes wide on call). 12 of 15

High IV: Strategy Analysis

   

A straddle is comprised of a short call, and a short put, both sold at the same strike. 13 of 15

High IV: Strategy Analysis

   

An Iron Fly is a defined straddle. In this example the wings are each 10 strikes wide. 14 of 15

High IV: Strategy Analysis

Portfolio Jade Lizard BWB Straddle 10pt Iron Fly

P/L $5,669 $1,247 $15,013 $6,102 # of Wins 70/75 50/75 52/75 45/75 % of Wins 93% 67% 69% 60%

Avg. Credit $1.06 $0.28 $7.18 $5.49 Avg. ROC 8.48% 8.31% 8.14% 18.14%

Biggest Loss -$201 -$186 -$1,009 -$577

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