Tastylive: Time to Trade Less?
The market has been fairly calm so far this year. Aside from a brief spike in volatility as the second, third, and fourth-largest bank failures in U.S. history occurred. Overall, it’s been a much calmer ride compared to 2022.
That may sound like good news… but for traders, it’s actually bad news. When markets don’t have big daily swings, there’s lower volatility. And that means lower option premiums to trade.
The volatility index, or VIX, got back under 15. Typically, the index averages around 20, and can spike to 40 or higher in a crisis. The read under 15 is the lowest since February 2020, right before the Covid crash.
However, about 30 percent of all trading days since 2000 have been lower. So we’re not quite back to historic lows yet.
Some see low volatility as a sign that the market is getting too quiet. And that volatility could spike higher. One measure of risk during these periods, known as the skew, suggests that could be the case.
When volatility is low at 15, a move to 25 is a 60 percent move higher. And such a move could occur in just a day or two depending on market events.
So traders may want to scale back on making trades, or move towards options trades that take advantage of low premiums today.