Market Measures - February 22, 2021 - Defining Risk in Low IV
What is the best way to reduce risk and outlier losses in periods of low Implied Volatility?
By implementing a strategy where we trade defined risk in low IV and undefined risk in high IV, our average P/L was very similar to trading only undefined risk, however, we took on 25% less portfolio volatility and reduced our largest loss by 40%.
The reason stems from “having protection when you need it most” i.e. having long wing protection in low IV environments where short premium tends to be the most vulnerable to outlier losses.