Low Volatility Strategies Options

Low volatility strategies options

When implied volatility is low, we will utilize strategies that benefit from increases in volatility as well as more directional strategies.

Low volatility strategies options

Historically, implied volatility has outperformed realized implied volatility in the markets. For this reason, we always sell implied volatility in order to give us a statistical edge in the markets.

Low Volatility Option Strategies (SPX Put Credit Spreads)

While we often search for a high IV rank at order entry, the market does not always accommodate us. In bull markets, as the VIX drops, implied volatility tends to be low in equities.

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Just like we take advantage of reversion to the mean when IV is high, we continue to stay engaged and do the same when it gets to an extreme on the low end. For this reason, in low IV, we will use strategies that benefit from this volatility extreme expanding to a more normal value.

Low volatility strategies options

Now that we understand the reasoning behind why we put on low IV strategies, it is important to understand the specific trades we look to place.

We are more prone to buy calendar spreads when underlyings are at extreme lows in IV.

Low volatility strategies options

We also purchase debit spreads as opposed to selling credit spreads when we want to make directional plays. Most importantly, in low IV markets, we continue to look for underlyings in the market that have high IV, as premium selling is where the majority of our statistical edge lies.

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