Normally, we manage our winners and exit our trades when we realize a certain percentage of our maximum potential profit. Assuming we entered a trade based on high IV Rank, what if we were to exit based strictly on vol contraction?
By the time IV Rank drops 30-40 points, so much premium has been pulled out of the options that it doesn't pay to stay in. If you averaged $3.69 for the first 25 days, and $3.18 for the entire 43 days, then a little algebra reveals that you only averaged $2.47 for the remaining 18 days. You'd be better off closing when the IV Rank dropped below 50 and redeploying the capital in another trade.
It also appears to be profitable to exit even sooner if the IV Rank drops 15 points or more soon after entering the trade. It is important to note that was a purely mechanical study. They closed the trades regardless of whether they were winners or losers. Perhaps even more profit would have been gained by not closing the losers until they became profitable.
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