3 Option Strategies to Use During Low Volatility Markets

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 times of low volatility:

Put and 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.

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 early when it shows a profit.

Ratio Spreads

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

The P&L diagram below is for a call backspread where you sell one call and then buy two calls at a higher strike.

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

Put Calendars and Call Calendars

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

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 ensure 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 worth the investment.

Visit the Handbook's Strategies section to learn more!