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Know that IVs tend to be relatively efficiently priced. True vol arb is done by a relatively small set of advanced quant trading firms plus some larger prop players.
How do you use it in your favor? - buy low / sell high - applies equally in the vol space. (Again w the caveat of relatively efficiently priced)
Look at implied volatility in context with historical volatility, for each ticker that you trade. Higher volatility occurs during earnings and important catalysts like FOMC meetings and economic data updates. If you can find the support and resistance, use credit spreads. Put in a put credit spread at support and a call credit spread around resistance. Iron condors work wonders if you do them right. During times of low implied volatility, trade debit spreads.
So you mean that in high volatility I can place a condor above resistance and below support and, as high IV tends to go low, leverage time decay and the drop in volatility? And the opposite when volatility is low?
My approach was basically as the IV on SPY has recently been higher, I would paper trader directional trades eg stradles or inverse iron butterflies but, if I understand you correctly, I would need to do the opposite? Thanks!
I agree with PC1 that the relationship between IVOL and historical vol is a good signal. But I’m not aware of strategies that just use IVOL alone.
I use the IVOL/HVOL ratio for two secondary indicators.
1) trade direction: if IVOL is trading at a significant premium to HVOL (ie >25%) AND the underlying is oversold, I’ll either go long or close out a short. If the underlying is overbought and there’s a significant IVOL discount I’ll short (especially if the underlying is in a bearish trend).
2) trade construction: I’m more likely to go short volatility or just trade the underlying if there’s an IVOL premium and more likely to go long volatility if there’s an iVOL discount.
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