Option sellers prefer volatility. It is essential to trade consistently in all market conditions. Here are three strategies you can use in low-volatility markets.
Low-volatility trading is difficult for option sellers. When the markets are calm, options premiums can be small and narrow. It’s harder to sell options far from current stock prices for real value.
What should a trader do? It’s important to stay active and keep positions small, but it’s also important not to force trades that aren’t right into the market.
Spreads on Put and Call
You can also place directional bets based on overbought and oversold stocks. You’ll need to pay approximately 50% of the strike width for the strategy to be entered.
It shouldn’t ever be a prominent position. It would be best to try to hold directional jobs on both sides. Staying active in the market and closing trades early when they show a profit is essential.
You can use a spread if your directional assumption is extreme.
The P&L chart below shows a back spread, where you buy two calls and sell one at a higher strike.
You’ll be pleased to see a rise in volatility since you’re long 2x as many options as you are short. Remember, this is a substantial directional assumption.
Calendars for Calls and Put Calendars
Calendars work well in low-volatility markets. It is essential to choose your direction carefully. I recommend using call calendar spreads rather than put calendar spreads because volatility increases when markets fall.
You’ll then sell the option for the current month and buy the opportunity for the previous month, taking advantage of time decay and possible volatility increases.