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Mean Reversion

Tendency of volatility to return to average

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What is Mean Reversion?

Mean Reversion The tendency for implied volatility to return toward its long-term average after moving to extreme levels. When IV is far above its historical mean, it tends to decline; when far below, it tends to rise. Mean reversion is one of the strongest edges in volatility trading and underpins strategies like selling premium at high IV rank.

Complete definition

The tendency for implied volatility to return toward its long-term average after moving to extreme levels. When IV is far above its historical mean, it tends to decline; when far below, it tends to rise. Mean reversion is one of the strongest edges in volatility trading and underpins strategies like selling premium at high IV rank.

Example

AAPL IV spikes to 45% (99th percentile) after earnings. Over the next 2 weeks, it mean-reverts back to its typical 25% level.

Watch

Where the Edge Is: Implied vs Historical Vol Stock picking bets against the efficient market hypothesis. The measurable edge is the gap between implied and historical volatility. Transcript and key takeaways Subscribe on YouTube

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