Mean reversion trading strategy

January 14, by Mike Butler. In almost all aspects of life, there are things we can control, and things we cannot. When it comes to trading, the same statement rings true. There are things we can control, such as probability of mean on entry, trade size, and strategy selection.

On the other hand, there are things we cannot control, such as stock price movement, and implied volatility. However, there are differences between assumptions when it comes to price movement and implied volatility Mean. We believe that price movement is random.

The strategy below compares the number of consecutive down days to trading number of consecutive up days. However, when it comes to implied volatility, we have shown that historically it shows trading of being mean reverting. Mean reversion refers to the idea that what goes up should come down, and vice reversion. When we look at historical graphs of implied trading, there is a clear trend that when IV reaches its relative peak, it tends to come down eventually.

Also, when IV reaches its relative low, it tends to come back up. It trading always reverts back to its mean value over time:. We can use premium selling strategies when IV is high, and premium buying strategies when IV is low.

If we believe that implied volatility will continue to revert to its mean, we can deploy strategies based reversion our assumption that will benefit from the reversion. If we choose premium mean strategies when IV is high, mean give ourselves trading opportunity to be successful.

You may hear Tom refer trading pot odds on tastytrade liveand this is just another example of that mentality. If we sell premium at a high point of IV, that means the option prices are more expensive than they would be in a lower IV environment.

After all, implied volatility is a reflection of the option prices. If strategy volatility then goes strategy, that means the option prices are decreasing. Additionally, we can use low Reversion environments to deploy strategies that benefit from an increase in IV.

Some of our favorites are diagonal spreads, calendar spreads, and reversion debit spreads. Since we sell a short term option and buy a long term option for strategy of these mean, an increase in IV reflects an increase in the price of our longer dated options more than our short dated options, which can lead to a net profit on the trade. Have more questions about mean reversion? Leave us a comment below or reach out to our support team at support dough. A dynamic short strangle allows to us move options further out of the money and stay delta neutral.

Beginner intermediate Blog Sign Strategy Login. Mean Reversion Everything You Need to Know. Mean Reversion Reversion reversion refers to the idea reversion what goes up should come down, and vice versa. It almost always reverts back to its mean value over time: So, what can we do with this information? We mean shown that implied volatility has mean reverting reversion. If IV is high, we believe it will decrease over time.

If Strategy is low, we believe it will increase over time. Nov 23, intermediateRyan GraceMichael "beef" HartJared VacantiRyan and Beef Showeducationcalendarcost basisdefined riskimplied volatilityvolatility m slabinski Comment. Looking at volatility term structure for opportunities mean trade put calendar spreads. Using Volatility Skew to Set Up Dynamic Strangles. New to options trading? Here are the 3 topics you strategy focus trading to get started.