Options traders typically focus on implied volatility, as it forecasts the future price range of a stock (based on the stock’s option prices). Historical volatility is the standard deviation of a stock’s past returns and is therefore seen as a less valuable indicator.
However, is historical volatility actually useful to options traders? Can historical volatility be used as entry criteria to make more profitable options trades?
In this video, we discuss a 10-year study that investigates the profitability of short straddles on the S&P 500. We divide the short straddles into four buckets based on the implied volatility and historical volatility relationship when the trades were entered:
1. VIX at a 50% premium to the 20-day historical volatility
2. VIX at a 25-50% premium to the 20-day historical volatility
3. VIX at a 0-25% premium to the 20-day historical volatility
4. VIX below the 20-day historical volatility
In this video, you’ll learn which of these entries was most profitable, and which was the least profitable.
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