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The analysis is fundamentally correct, but unweighted. You have to examine what you lose the 10% of the time that the vol is wrong.
If a strategy made you money 90% of the time would that be enough?
Let's say the same strategy would bankrupt you 2% of the time...same strategy.
Stuart Hazlewood wrote:
> 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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