3 Option Strategies To Use During Low Volatility Markets

low volatility
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Low volatility trading is tough for option sellers like us.

When markets are calm premiums are small and narrow - meaning that we cannot sell options far from the current stock price.

So what's a trader to do!?

Staying active, and keeping position size small, is important but you don't want to force trades into the market that aren't right.

Here are three options strategies you can use during these low volatility times:

1) Put/Call Debit Spreads

Make some directional bets on overbought or oversold stocks. Using debit spreads, you'll pay to enter the strategy and will look to pay about 50% of the width of the strikes.

Option Bull Spread

This shouldn't be a big position (when should it ever) and you should try to have some plays on both sides.

The idea here is to keep active and close the trade out early when it shows a profit.

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2) Ratio Spreads

If your directional assumption is extremely strong, you can use a ratio spread.

The spread P&L diagram below is for a call back spread where you sell 1 call and then buy 2 calls at a higher strike.

Call Backspread

Since you are long 2x more options then you are short you'll be happy to see an increase in volatility. But remember that it's a big directional assumption (much more so than the debts spreads above).

3) Put/Call Calendars

Calendars are great for low volatility markets! You have to be a little careful on your direction and I suggest using put calendars more than call calendars because volatility usually rises as markets fall.

Calendar

Here you'll sell the front month option and buy the back month option taking advantage of the time decay and a possible rise in volatility.

Another tip is to make sure that the front month option has enough premium to make it worth the trade. Don't sell a front month option with .10 or .20 of value - it's just not work the investment.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and two daughters.