Option Strategies For Low Volatility Environments

Today, we’re going to look at which options strategies are best for low volatility environments.

Option investors take advantage of high implied volatility (IV) by selling options as in credit spreads and iron condors. But what are options for investors to do when IV is low?

Do the opposite. Buy options.

Buy long-dated options, LEAPSstraddlesstranglescalendars, and protective puts.

However, buying options has a couple of disadvantages.

We cannot just picking random calls and puts to buy.

We have to combine our long options in structures that will overcome those inherent disadvantages.

In addition, we have to look at other criteria and wait for conditions to line up.

Implied Volatility And Option Prices

When IV is low, the price of options is less expensive.

Therefore, it is a good time to buy options.

If we own puts and calls as IV increases, our options will increase in value.

Increasing IV will pump up the extrinsic value of the option.

Disadvantages Of Buying Single Options

However, long calls and long puts have two disadvantages:

  1. Time decay — the value of the option loses value with time. They have negative theta.
  2. Strong directionality — we need to get the direction correct in order to make money.

Poor Man’s Covered Call

To over-come theta decay, we buy long-dated options that are six months, nine months, or even a year out in time.

Options with expiry a year away or more are called LEAPS.

They have slower time decay than short-dated options.

To further reduce the time decay, sell short-dated options against the long-dated one.

The short option has positive theta to offset some of the negative theta of our long option.

They also have the effect of reducing the directionality of the long option.

On May 7th, 2020, the VIX (S&P volatility index) and RVX (Russell volatility index) are both under their 50-day moving average and 20-day moving average.

General market volatility is low.

But we also have to check the IV of the underlying stock itself.

Nike (NKE) implied volatility is within the low end of its range.

Its stock price is above both its 20-day average and its 50-day average. RSI is above 50, but not overbought.

We will look at bullish, bearish, and neutral strategies.

Let’s start with a bullish strategy.

Because NKE is a bullish stock in a low IV environment.

An investor puts on a Poor Man’s Covered Call strategy by buying the 67-delta call that with expiry January 15, 2021 (253 days away).

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Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are ...

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