Historical vs Implied Volatility Trade

Entry Logic

• Entry trigger: A significant spread between historical volatility (HV) and implied volatility (IV).
• Confirmation: IV is much higher than HV (sell premium) or HV is much higher than IV (buy premium).
• Timeframe: Daily chart.
• Location context: Not applicable.
• Market condition: A disconnect between market expectations and reality.

Exit Logic

• Profit target: The spread between HV and IV narrows.
• Scaling out: Not applicable.
• Trailing stop: Not applicable.
• Signal failure exit: The spread continues to widen.
• Opposite signal exit: Not applicable.
• Time expiration: Exit after 30-45 days.
• Momentum loss: Not applicable.

Stop Loss Structure

• Hard stop: A predefined loss level on the options position.
• Soft stop: Not applicable.
• Max dollar loss: 2% of account capital.
• Max percent loss: 2% of account capital.
• Structural stop: Not applicable.

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 the volatility spread.
• Conviction sizing: Not applicable.
• Scaling in: Not recommended.
• Scaling out: Not recommended.

Trade Filtering

• Market conditions to avoid: When HV and IV are closely aligned.
• Specific setups required: A large spread between HV and IV.
• 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: Not applicable.
• VWAP relationship: Not applicable.
• MA relationship: Not applicable.
• Range location: Not applicable.
• Higher TF alignment: Not applicable.

Trade Management Rules

• Breakeven: Not applicable.
• Scale out: Not applicable.
• Add size: Not applicable.
• Fast vs slow moves: This is a slow-moving trade.

Time Rules

• Optimal window: When there is a large spread between HV and IV.
• Times to avoid: When HV and IV are closely aligned.
• Session notes: Not applicable.

Setup Classification

• A+ setup: A historically large spread between HV and IV.
• A setup: A significant spread between HV and IV.
• B setup: A moderate spread between HV and IV.
• C setup: HV and IV are closely aligned.

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 the spread between HV and IV.

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 the spread between HV and IV continues to widen.
• 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.

Advanced Components

• Regime detection: Not applicable.
• Filters: Use a liquidity filter for options.
• Correlation: Not applicable.
• MTF alignment: Not applicable.

Location

• Where strongest: When there is a large, statistically significant spread between HV and IV.
• Where weakest: When HV and IV are in alignment.