Mean Reversion
Tendency of volatility to return to average
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.
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