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I just finished reading a book by someone called K. Anand containing some rudimentary option strategies (backspreads, naked strangles, hedged with a long straddle when IV falls, etc.)
The news in it was the following: according to the author Implied Volatility provides the real range for the market over any given time period. Thus you take the at the money IV for let's say the S&P and project the market range based on this number. For example, assume the following:
Sept S&P is @ 1200
At the Money IV = 15%
Days to expiration (August) = 32
Expected movement = sqr root (32/365) * 1200 * .15 = 53
Expected range at expiration = 1147 to 1253
The real news is that, according to Anand, this range has held true historically 90% of the time. He therefore recommends strategies that are short at 1 sigma based on the at the money IV.
Since I have not been able to find a database of at the money IV for the S&P, I have not been able to back test the theory. Any comments?
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