When stocks are trading at their highs, traders become complacent and market volatility sinks like a rock.
In fact, there are specific strategies that you can execute for extraordinary returns in a low vol market.
There is nothing worse than trading a great option strategy at the wrong time— it’s not only frustrating but you could end up paying a severe cost.
Imagine spending all that time analyzing charts, picking out the perfect trade…But you forget to check the most important variable in the options pricing model—implied volatility.
Next thing you know, that beautiful trade that was going to pay for your dream vacation ends up being a big fat loser.
I haven’t broken any monitors this year, but I have managed to make seven figures in trading profits… if want to be on the other side of the losing trade and need some help, then click here to join WMM today
Whatever you do… don’t be that guy.
I know the best trades for low volatility. And I’m going to share them with you right now.
Option contracts price based on five major components:
- Time to expiration
- Distance between the strike price and the current price
- Interest rates
- ‘Risk-free rate’
- Implied volatility
The first four are known items. You can look them up at any financial website or within the option chain itself.
The implied volatility is an output. You can’t actually figure out implied volatility without looking at the current price.
I know it sounds a little backward. But let me explain it like this.
Implied volatility should tell you the market’s expectation for a percentage change in price on an annualized basis.
Note: If you’re looking at a 30 day IV, it is the expectation for the next 30 days annualized.
So, where does this price come from?
It is actually derived from the current market price available.
That means that implied volatility really comes from supply and demand, just like a stock.
It makes sense when you think about it.
When investors want to buy protection they buy puts. The more people buying protection, the higher the price of the put.
So, the higher the implied volatility, the higher the price of the option.
Now let’s look at which trades work well in low volatility environments.
Directional bets buying puts and calls work great in low volatility environments. They’re simple, easy to understand, and one of the first things most traders learn.
In low volatility environments, you want to buy premium.
I like to play both directions in the market.
For example, here at the highs, I expect we could snap lower. But, I want to keep riding this trend.
So, I take bullish positions on shorter time frames, and bearish ones on longer ones.
Here’s a good example.
Recently I bought COST long calls.
My setup is laid out below.
COST 135-minute chart
I broke things down from the daily chart to the 135-minute chart. That lets me play in a shorter time frame.
However, I still want to see all the elements of the trade setups that I normally require.
This one had a clear trend, a nice consolidation pattern, and a squeeze.
Once I got a nice pop in the stock, I sold off my calls, took my profits, and called it a day.
But, at the very same time, I sold a call spread against the QQQ. That let me play the shorter-time frame on the COST chart, but have a slightly bearish play on the daily QQQ chart.
What do I do if I don’t know the direction of a stock?
That brings me to two trades that I don’t use often, but are worth discussing: straddles and strangles.
Both trades work similarly.
Straddles buy a put and a call at the same strike price at-the-money and same expiration.
Strangles do the same thing, except buy puts and calls out-of-the-money.
The payout graphs look very similar.
The main difference comes down to cost.
Straddles cost more to set up because you buy at-the-money strikes. Strangles cost less the further out you go.
These trades work well with low implied volatility environments for two reasons.
First, implied volatility doesn’t tend to stay low for long. Plus rises in volatility increase the price of your position, which equals more profits.
Second, rises in implied volatility tend to come with stock price movements. That takes a stock off its current price, which is exactly what you want.
This trade works great when you find a stock that’s been sitting idle but should make an explosive move soon.
Note: Neither of these trades works near earnings. IV actually gets extremely high right before earnings. That’s the wrong time to play these trades.
Don’t start popping off trades without checking out the Implied Volatility first. You’ll save yourself a lot of money and bad trades.
You can check out how I put these ideas into action with real examples in a recent article I published.