Low volatility trading can be tough for option sellers. When markets are calm, premiums are small and narrow and it's more difficult to sell options far from the current stock price for any real value.
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 positions with directional bias on both sides. The idea here is to keep active and close the trade early when it shows a profit.
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 calendar spreads because volatility usually rises when 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.
Pro Tip: ensure that the front-month option has enough premium to make it worth the trade.