Today the VIX is hovering around 12 to 13. The VIX of course is the volatility Index for the S&P 500 or SPX. This would generally be considered a low volatility environment with the VIX at that level.
What option strategies work best in this low volatility environment?
Volatility tends to return to the mean. So if we are at a low volatility, chances are that the volatility will rise over the near-term.
Option strategies that are long volatility or very high risk-reward are best at this time. A good long volatility strategy is the calendar spread or time spread.
This involves, of course, selling an option strike near the money, in the near expiration, and buying that same strike in a further out time period.
An example would be, selling an option expiring at the December options expiration and buying one that will expire in the January options expiration at the same strike.
You can also utilize weeklies where you sell an option that will expire in one week and buy one that will expire in another, that is, your time spread or calendar strategy.
This, of course, benefits from increased volatility and is also non-directional in its price movement perspective. Calendars have a very high risk-reward, meaning that for what you pay for them, the returns can be large.
Of course, they do have to trade in a range or the trade can get into trouble. The iron butterfly is a short volatility strategy but has a high risk- reward that will work in this environment also.
The iron butterfly involves selling two verticals, a call vertical at the money with a further out long wing, in the same expiration and a put vertical at-the-money with a further out long, in the same expiration.
You will benefit from falling volatility and also time decay, as this is a positive “theta” trade as is the calendar also.
Both of these strategies are good choices in this environment of low volatility. At Sheridan Mentoring, we educate traders on how to use these strategies and more every day.
Consider us whenever you want to enhance your option trading ability. Trading options as a business requires discipline and education, and we are happy to help you with that goal.
– Mark Fenton
Senior Options Mentor
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