The stock market has been in a smooth uptrend over the last few years, and it’s unlikely that we’ll see a substantial correction for some time. However, just because the market is in an upward trend doesn’t mean that there aren’t still opportunities to make money from options strategies when the market is less active.
Strategies to consider if you want to capitalize on low-volatility situations:
Covered calls
Covered calls involve selling call options against your current holdings of stocks or ETFs. When you sell covered calls, you continue to own shares of the underlying security but get paid by the option buyer each month for their right to buy your shares at a predetermined price (strike price)on or before the option’s expiration date. If the market doesn’t move much and buyers don’t exercise their right to buy your shares, you get to keep the original stock plus any additional gains from the sale of your call options. You can earn a monthly stream of income by selling covered calls while also having downside price protection in place on your long positions.
Crushing iron condors
Selling credit-spread options is one of my favourite ways to invest when volatility shrinks to historical lows. I’ll often employ multiple iron condors at once since these trades are typically small, unlike how many contracts I sell (iron condors are composed of four different credit-spread strategies). When there aren’t any major market drivers pushing up or down, I can often earn a credit spread on 3-4 different positions. Because iron condors backload the premium earned, the earlier I sell my spreads – and lower volatility falls – the more contracts I can sell with each roll.
Single bullish leg options
This is another relatively easy strategy to manage when volatility falls, as you don’t have to track as many moving parts. What’s nice about this strategy is that it only takes one side of the trade to work for you to see a profit. With these kinds of trades, you’re speculating in just one direction instead of speculating on both sides (long and short). You could be bullish or bearish, but either way, if there isn’t much movement in the overall market, it’s much easier to pick the direction and bet with a high degree of confidence.
Buy Puts
When volatility is extremely high, both in terms of the overall market and in comparison to a stock’s past fluctuations, traders who are bearish on the stock may buy puts based on the twin assumptions of “buy high, sell higher,” and “the trend is your friend.”
Traders who want to cut the cost of their long put position may either buy a further out-of-the-money put or defray the expenditure of their long put position by putting on a bear put spread, which is a method known as adding a short put at a lower price.
Short Straddles
In a straddle, the trader sells or purchases a call and puts it with the same strike price to profit from the short call and short put positions. This method is used when the trader expects IV to decline significantly by option expiration, allowing the bulk if not all of the premium received on the short put and short call positions to be kept.
Writing a short put places the obligation on the trader to purchase the underlying at the strike price even if it falls to zero, but writing a short call has theoretically unlimited risk, as previously stated. The trader, however, gains some margin of safety given by the premium received.
Bottom Line
Traders employ a variety of methods to profit from stocks or securities with high volatility. Most of these strategies entail infinite potential losses, which should be avoided by expert options traders who are familiar with the risks of options trading. Beginners should stick to purchasing straightforward calls or puts.
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