ETFs: Dipping Into High IV

Nearly half-way through the first quarter of 2016, the market continues to chop like a marathon episode of Iron Chef. If you're looking for places to find premium selling opportunities during the Great Chop, you might look at ETFs with high implied volatility.

So, which ETF represents the greatest opportunity?

The tastytrade research team ran a study to answer that question. Assuming consistent capital usage for the strategies, they compared holding the trades through expiration and managing the trades at 50% of profit.

The study incorporated the following parameters:

  • Initiated 1 standard deviation strangles from 2005 to present
  • Used S&P 500 (SPY), Russell 2000 (IWM), and Nasdaq (QQQ)
  • Strangles were scaled to represent $3,000 in buying power

As you can see from the results in the graphic below, selling strangles has been profitable during a great majority of instances since 2005, especially when managing the trades at 50% of profit:

ETFs_Implied Volatility_Market Measures

The chart above shows that selling strangles in SPY, IWM, and QQQ has been profitable in greater than 88% of instances during the timeframe examined - not too shabby.

Next, the guys pulled out the data for the ETFs with the highest and lowest implied volatility (IV). Re-running the study on only these two groups further indicated that selling strangles in the higher IV ETFs produced a greater percentage of profitable trades.

For all the details, watch the entire episode of Market Measures on "Choosing ETFs Based on Implied Volatility."

More Tactics for Volatile Markets

So let’s assume the following scenario:

  • You’ve identified the ETF with high IV for a short premium strangle trade.
  • You scaled the trade to fit your portfolio.
  • The market moved against you.
  • But, you still like the trade and want to deploy additional risk (capital) in the same symbol.

The above situation should sound pretty familiar - virtually every option trader has faced a similar challenge at some point in their career. The question is whether he/she should move the strike closer to at-the-money (ATM) or simply sell more options at the existing strike.

In another Market Measures the research team charted the success of two different strategies - the first selling two 16-delta calls (in addition to the put), and the second selling one 30-delta call (in addition to the put).  Both strategies were held through expiration. The subtle difference being the sale of two calls that were further out of the money versus one call that was closer to the money.

As you can see below, selling two 16-delta calls slightly outperformed the strategy of selling one 30-delta call (i.e. moving closer to ATM):

VIX_Strikes_Market Measures

Then the trades were managed at 50% of profit, and the results again supported the strategy that involved selling two calls as opposed to one that was closer to at-the-money.

So if you do find an appealing short strangle trade in the world of ETFs and would like to deploy additional risk, consider selling more of the same line as opposed to moving your strikes closer.

We hope you’ll take the time to watch the entire episode of Market Measures titled “Sell More or Move the Strikes Closer” when your schedule allows.

Please don’t hesitate to contact us at support@tastytrade.com with any questions or comments.


Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.