Market Measures - July 13, 2021 - Immediate Impact of IV Changes

published 1 week ago by tastytrade, Inc.

Option premium tends to increase and decrease with the implied volatility of the underlying, but by how much? Today, we look at how the initial credits of 16Δ SPY strangles have changed with large expansions and contractions in the VIX.  Expansions in implied volatility cause average increases in premium to the tune of +10%, with more extreme daily expansions (over +15%) inflating premium prices by an average of 21%. Contractions in IV cause premiums to deflate, with daily contractions larger than 15% deflating premium prices by roughly 13%. Premiums tend to be much more sensitive to increases in volatility (rather than decreases) since IV expansions tend to be more violent than contractions.

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