Implied vs Historical Volatility Spread when Selling Options
I came across a Market Measures segment on TastyLive which has me scratching my head (link in comments). For those that don't want to sit through it, here is a summary:
\>Since we know that IV tends to overstate realized volatility, approx 75% of the time in the S&P, we sell options to profit from this overstatement
\>If we compare the spread between implied volatility (IV) and historical volatility (HV), do trades perform better when the spread is narrow or wider?
\>To test this, sell 16 delta 45 DTE strangles managed at 21 DTE on SPY from 2005 - 2021. Then split the data into four groups of IV/HV spread: <1, 1-3, 3.6, >6.
(They don't say but I assume these numbers are percentage points. For example, if HV is at 12% and IV is at 15%, the spread is 3. They also don't say whether the spread is only when IV is higher than HV, or if it also includes times when IV is lower than HV. Some of their wording implies the former.)
Here are the results:
* Less than 1 | Win Rate: 80% | Avg Profit $54 | Avg Loss -$188 | Expectancy per $1 risk $0.29 * 1-3 | Win Rate: 82% | Avg Profit $27 | Avg Loss -$251 | Expectancy per $1 risk $0.11 * 3-5 | Win Rate: 80% | Avg Profit $20 | Avg Loss -$244 | Expectancy per $1 risk $0.08 * More than 6 | Win Rate: 76% | Avg Profit $24| Avg Loss | $229 Expectancy per $1 risk $0.11
The highest average profit and expectancy, and smallest average loss occur when the IV/HV spread is less than 1. As the spread widens, the win rate, profits, and expectancy decrease.
They say that although one expects short premium trades to perform best when spreads are highest, within this study, the trades often occurred as IV was increasing, which ends up negatively impacting the P/L. Furthermore, they say that when the IV/HV spread is between 1 and 6, we see the worst performance due to these occurrences coinciding with low IV environments.
I'm missing something here. The Tasty guidance is typically to sell in high IV, and yet this study shows that selling at lower IV, when it is closer to HV, is more profitable. This leads to a lot of questions which remain unanswered on their segment. (Like if the spread includes times when IV is below HV. If so, that would help explain it).
I know it's free content and all, but rather than discuss a research finding that appears to be in direct contradiction to their core trading thesis, they just raise and eyebrow and hurriedly move into the next segment so they can talk about fish tacos or whatever.
Can anybody else shed light on what this piece of research is saying?