Tastylive: When Volatility Is High Use this Strategy
With markets near all-time highs, market volatility has been low. For the past five weeks, markets have been pricing in an overall move of about 1.1 percent. That’s historically near the lower end of trading.
When market volatility is low, so are option premiums. That can make some option trading strategies more challenging than others. Selling option premium becomes less attractive when volatility is low. But buying options can become more attractive.
The measure for market volatility for options traders is implied volatility, or IV. Since last March, implied volatility has fallen by roughly half.
The volatility index stands around 14. On average, it tends to trade closer to 17. And it can and often will spike to 20 or more when the market has a down day.
From a level of 14, even a reversion to the market’s average volatility will look like a big spike.
When those big spikes happen and volatility is higher, investors can fare better with trades like selling put options or covered calls for income.
And a higher volatility spike tends to mean a sizeable market move in one direction or another. Those events can usually provide opportunities for traders who bet on markets pulling back from that kind of extreme move.