It's not always easy to take the measure of a market, whether you've been trading for a day or a decade. On this segment we look under the hood—options probabilities, volatility, trading strategies, futures, you name it—so your trading mechanics are built to manage more winners.

Trading volatile strategies can be profitable, but the return can also be hindered due to greater P/L swings. So what can we do about the volatility?tastytrade analyzes the importance of reducing portfolio volatility and the potential solutions.由tastytrade

Even though the market action on Friday and Monday seemed to be somehow related, historically the chance of seeing moderately large moves like that back to back one are largely independent, i.e. due to chance. This is different than what we know about extreme outliers (+/- 3% or greater), which do tend to cluster together as seen in 2020.…

Friday’s Quad Witching event was pretty average compared to previous ones since 1993 even though raw price moves seemed on the higher end. Since 1993, there was virtually no difference in volatility between random days and Quad Witching days from either daily range or price change measurements.由tastytrade

Black swan events can be thought of as “unmeasurable” moves that are actually near impossible to model with any degree of accuracy...thus the best and only defense is to stay small whenever trading undefined risk strategies. The theoretical probability of such an event that is suggested by a normal distribution tends to be understated, meaning that…

We found a strong correlation in major equity indices and their corresponding IV indices, but a less so correlation in strangle positions on these underlyings. After comparing risk adjusted returns of a portfolio of only SPY, IWM, or QQQ strangles vs a combined portfolio of all three, we find a 16% risk reduction with no sacrifice to average gains …

We see that the BPR of an OTM strangle depends on both the price of the underlying and its implied volatility. Over time, we observed that high implied volatility environments carry 5x more premium per unit of capital than low IV, making it easier to capitalize on these opportunities easier from a capital usage perspective. This is a reason why sta…

tastytrade explains why short term relationships between price and BPR are more volatile than long term ones. Since BPR is affected by both price and the underlying IV, BPR fluctuates more violently than price in the short term (a 2:1 ratio as opposed to the long term ratio of 1:1) because IV moves in the short term but not in the long term. The re…

Attempting to figure out what one number tells us about the economic state of 300 million people is as futile as ‘scientifically’ picking the numbers that will be selected in the next Powerball drawing. There is no statistical significance in the difference between any day’s % change and volatility compared to the % change and volatility of an unem…

Comparing individual performance with a combined portfolio of SPY, QQQ, and IWM, shows diversifying even highly correlated assets can limit risk. After varying performance in 2020, this point is critical with a possible convergence or reduction in correlation. Next week we will analyze the corresponding volatility indices to see what is favorable w…

The “stability” of implied volatility and market prices are not indicative of less potential outlier risk. Stable and low IV environments (2017) carry high POPs similar to stable and high IV environments (second half of 2007), but the difference lies in the magnitude of average and outlier losses. Stable and low IV markets actually carried much hig…

tastytrade looks at markets with elevated but not declining IV, and observes the performance of short premium trades. Short premium positions do not require an IV contraction to be profitable. In fact, short premium profitability comes exclusively from expected moves being larger than actual moves. A stable and elevated IV environment is actually o…

tastytrade looks at how common a move like AMC and crypto affects the majority of the market. The recent craze of popular stocks and crypto is definitely not representative of most assets. With the mainstream underlyings (BTC/USD, GME, etc.) representing just the top 5% to 10% of all underlyings in terms of yearly ranges and daily moves.…

From 2005-2020, short 16Δ (delta) SPY strangles had an average P/L of $39 while short 16Δ GOOGL strangles had an average P/L of $10 (both managed early). Does this mean that SPY (currently worth $420 per share) is a more profitable underlying than GOOGL (currently worth $2,357 per share)? Join Tom and Tony as they use statistics to answer this ques…