Implied Volatility Percentile Trade

Entry Logic

• Entry trigger: Implied Volatility (IV) Percentile is above 80% or below 20%.
• Confirmation: Price action confirms a potential reversal in the underlying.
• Timeframe: Daily chart.
• Location context: Underlying is at a key support or resistance level.
• Market condition: High or low implied volatility.

Exit Logic

• Profit target: IV Percentile returns to its mean (50%).
• Scaling out: Scale out as the underlying moves in the desired direction.
• Trailing stop: Use a moving average to trail the stop.
• Signal failure exit: IV Percentile continues to move to extremes.
• Opposite signal exit: A new high or low in IV Percentile is made against the position.
• Time expiration: Exit after 30-45 days.
• Momentum loss: The underlying stalls and moves sideways.

Stop Loss Structure

• Hard stop: A close beyond the support or resistance level.
• Soft stop: If IV Percentile does not start to revert to the mean within a week.
• Max dollar loss: 2% of account capital.
• Max percent loss: 2% of account capital.
• Structural stop: Beyond the recent high or low of the underlying.

Risk Management Framework

• Risk per trade: 1% of account capital.
• Daily limit: Not applicable.
• Weekly limit: 5% of account capital.
• Max drawdown: 15% of account capital.
• R:R requirement: Minimum 2:1 risk-reward ratio.

Position Sizing Model

• Sizing approach: Fixed fractional sizing.
• Volatility adjustment: The strategy is based on volatility.
• Conviction sizing: A+ setups get full size.
• Scaling in: Add to the position if the underlying moves in the desired direction.
• Scaling out: Scale out at predefined profit targets.

Trade Filtering

• Market conditions to avoid: Trading when IV Percentile is in the middle of its range.
• Specific setups required: High or low IV Percentile with a confirming price action signal.
• Instruments: Stocks and ETFs with liquid options.
• Time restrictions: Not applicable.
• Chop/news avoidance: Be aware of earnings releases and other news events.

Context Framework

• Trend direction: Can be used in both trending and ranging markets.
• VWAP relationship: Not applicable.
• MA relationship: The underlying may be extended from its moving averages.
• Range location: The underlying is at the edge of its recent range.
• Higher TF alignment: Check the weekly chart for context.

Trade Management Rules

• Breakeven: Move stop to breakeven after a 1R profit.
• Scale out: At 1.5R and 2R profit targets.
• Add size: If the setup improves.
• Fast vs slow moves: Be prepared for both fast and slow moves.

Time Rules

• Optimal window: When IV Percentile is at extremes.
• Times to avoid: When IV Percentile is in the middle of its range.
• Session notes: Not applicable.

Setup Classification

• A+ setup: IV Percentile above 90% or below 10% with a clear reversal signal.
• A setup: IV Percentile above 80% or below 20%.
• B setup: IV Percentile above 70% or below 30%.
• C setup: IV Percentile in the middle of its range.

Market Selection Criteria

• Instruments: Stocks and ETFs with liquid options.
• Volume: High volume in the underlying and its options.
• Volatility: The strategy is based on implied volatility.

Statistical Edge Metrics

• Win rate: 60-70%.
• Avg win: 2R.
• Avg loss: 1R.
• Profit factor: 1.8.
• Expectancy: 0.6R per trade.

Failure Conditions

• When strategy fails: When implied volatility remains high or low for an extended period.
• Specific scenarios to avoid: Trading illiquid options.

Psychological Rules

• Mental discipline: Patience to wait for the right setup.
• Key mental discipline requirements: Discipline to stick to the plan and not get shaken out by volatility.

Advanced Components

• Regime detection: Use a filter to identify the current market regime.
• Filters: Use a liquidity filter for options.
• Correlation: Be aware of the correlation between the underlying and the broader market.
• MTF alignment: Check the weekly chart for context.

Location

• Where strongest: When IV Percentile is at historical extremes.
• Where weakest: When IV Percentile is in the middle of its range.