tastylive: Market Measures

Daily ranges have contracted 15-33% across major markets since August, compared to January-August 2022 averages. The S&P 500 saw ranges shrink from 96 to 64 points (33% reduction), while Nasdaq ranges dropped from 434 to 316 points (27% decrease). As volatility declines, traders should adjust position sizing proportionally—reducing exposure by similar percentages as range contraction. For example, trading at two-thirds normal size in S&P positions when ranges are down 33%. Markets traded in tight ranges during the session, with S&P futures up 5.5 points, Nasdaq up 44, and Russell up 19. Bond markets continued weakness, signaling potential removal of rate cut expectations. Smaller price moves require tighter trade management and smarter product selection. Currency markets have contracted less than equity indices, potentially offering better trading opportunities for those seeking volatility.

The market measure segment examined how volatility impacts option skew, noting that SPY typically shows put skew because downside risk commands higher premiums. As volatility increases, both calls and puts become more expensive as a percentage of the underlying, though puts increase at a faster rate highlighting why hedging after market moves is challenging.

The market measure analyzed VIX One Day index for zero and one-day options trading strategies. Data revealed that when VIX One Day exceeds standard VIX, traders saw dramatically improved results: iron fly win rates jumped from 69% to 81% with higher average P&L. However, this optimal condition occurred only 8.5% of the time, making it a rare but powerful signal for zero DTE traders.

In this Market Measure segment, Tom Sosnoff and Tony examined the gambler's fallacy and its impact on trading decisions. The segment highlighted how this cognitive bias leads traders to believe patterns will continue or reverse based on past outcomes of independent events. Using a 10-year study of SPY 16-delta strangles at 45 DTE, the hosts demonstrated that increasing position size after losses doesn't improve profitability but dramatically increases risk exposure. Data showed managing positions at 21 days significantly reduced volatility compared to holding until expiration. The key takeaway: after winning or losing streaks, probability remains unchanged. Traders should maintain consistent position sizing and management strategies rather than "doubling up to catch up.

Today's research segment was about how option skew reflects the direction of risk velocity in different assets. The study analyzed SPY, IWM, UNG, and GLD over 10 years using 16-delta strangles with 45 DTE managed at 21 days. Results confirmed that skew accurately indicates potential risk direction. SPY and IWM showed put skew matching their downside risk, while UNG and GLD displayed call skew aligning with their upside risk potential. Interestingly, SPY showed larger upside outliers than downside ones, likely because markets must rise more percentage-wise after a decline to reach previous levels. The study reinforces that option pricing reflects rational expectations expensive puts or calls signal where explosive moves might occur, not necessarily market direction.

TLT and bond premium selling shows improved metrics in 2025 compared to the past decade, despite historically low implied volatility. While bond ETFs typically trade at a volatility discount to the S&P 500, this year's TLT environment has yielded better results for premium sellers. Data shows 2025 bond trading has delivered triple the average profit, 13% higher premium relative to buying power, and significantly reduced maximum losses compared to the 10-year historical average. Price volatility has decreased dramatically to just 2% in 2025 versus the 10-year average of 21%. Despite these improvements, traders may still prefer alternative strategies like diagonal spreads or zebras due to capital efficiency concerns when dealing with TLT's relatively low implied volatility (currently around 12-13% with an IVR of 4).

Recent research on April's market pullback shows speed of movement impacts option positions more severely than magnitude of decline. The S&P 500 dropped approximately 1,000 points in a remarkably short timeframe, creating notable losses for option sellers. Analysis of SPY 1-standard deviation strangles over two decades reveals the April 2025 correction produced the second-highest loss-to-credit ratio in 20 years, despite only a 19% market decline compared to 2020's 34% and 2008's 48% drops. Key findings: option selling strategies maintain strong overall success rates (84% win rate) with median loss-to-credit ratio of just 1.2. However, low initial volatility environments create the most dangerous scenarios for premium sellers, as demonstrated in both 2020 and 2025. For traders, proper position sizing remains critical, especially during periods of artificially suppressed volatility when premium is limited but exposure to volatility expansion events is highest.

Thus market measure explores the relationship between S&P 500 (SPX) and VIX at market tops. Analysis of 35 years of data revealed that 8% of all trading days since 1990 saw the SPX at all-time highs, with two distinct periods of significant occurrences: 1990-2000 and 2014-present. During these market peaks, the median VIX typically runs about four points lower than on regular trading days, with a median of 13.4 across the 30-year period. Since 2014, the median VIX at market highs dropped to 12.8, despite elevated post-COVID volatility. Interestingly, current market conditions appear unusual, with the VIX trading higher than historical patterns would suggest at market peaks. The S&P was up 14 handles during this discussion, with volatility remaining bid.

A market measure segment discussed expected move bias, examining how implied volatility compares to realized moves across different time frames. Data spanning 25 years revealed that 45-day options consistently show expected moves exceeding realized moves, explaining tastytrade's preference for this timeframe in their trading mechanics. The analysis showed 45-day options offer optimal balance between P&L potential and consistent volatility overstatement compared to shorter or longer-dated options, providing strategic advantages for traders seeking to maximize occurrences.

This detailed market measure analysis revealed surprisingly weak correlations between major asset classes including S&P 500, U.S. dollar, and bonds. Research spanning 10 years of data showed essentially non-correlated relationships between these markets, contradicting traditional assumptions about their interconnectedness. The only reliable correlation identified was between S&P 500 and volatility—when stocks rise, volatility falls and vice versa. This challenges many macro trading strategies that attempt to predict one market's movement based on another.

Tasty Live's research team examined how well expected price ranges forecast market movements across different time frames. Using 25 years of SPY data, they found that VIX-based estimates accurately capture price movements 83-84% of the time for forecasts between 10-100 days. Accuracy diminishes with longer timeframes, dropping to 67% for 365-day forecasts. Of the instances when prices exceeded the expected annual range, 84% broke to the upside, with prices ending about 6.2% higher than the upper estimate – reflecting the persistent bull market. The findings reinforce why the 45-day trading timeframe is optimal, as forecasts maintain peak accuracy around 83-84% in that range while balancing time decay and predictability.

Tastylive hosts Tom Sosnoff and Tony Battista analyzed zero DTE iron fly strategies, sharing research on optimal approaches based on two years of backtesting data. Trading these at 9 a.m. with $10, $20, and $30 wings reveals varying win rates based on profit targets. Key findings show that iron flies with $20 wings targeting 10% profit achieve a 78% win rate, while more aggressive 20% targets win 61% of the time but with larger average profits ($177 vs. $92). The hosts demonstrated the strategy live by executing an SPX iron fly with $20 wings for $13.75 credit. Research indicates Thursday is the worst day for zero DTE trades. The hosts emphasized early profit-taking as crucial for success, noting "there's no wrong way to sell zero DTE premium as long as profits are captured early."