Don’t Expect This Low Volatility To Last Forever

Market volatility may be ready to rise over the near-term.  And this could make navigating the stock market a bit more interesting over the coming days/weeks.

Today I’d like to highlight why this may be while while showing some ways to trade it with options.

Long Strangles are my favorite way to trade long volatility. I’ll typically go out about 6-9 months to reduce the effects of time decay. I’ll hold the trade for around a month and hope we get a wild swing in that time. Sometimes I’ll hedge out the Delta by buying or selling stock so it becomes a pure volatility play.

Watch That VIX!

You can see in the chart below, that we have only seen the VIX Volatility Index (INDEXCBOE:VIX) lower than it’s current reading of 11.26 on a couple of occasions in the last 12 months.

While calm markets may persist for another few weeks, but after that I imagine there will be something that causing panic to set in again. I’m not calling for a major panic, but expect to see a VIX spike up to 20 or so sometime between late Jan and the end of March.

Volatility Index Chart (VIX)

Currently, SPY February 15^th options are trading with implied volatility below 10%. That’s incredible cheap.

We may not see a volatility spike before February 15^th and short term options suffer a lot of time decay, so long strangle buyers may want to go further out in time.

In comparison, September expiry options are trading with implied volatility around 14%. So a long strangle using September options is going to be much more expensive both in dollar terms and in implied volatility terms.

Futures are down this morning and we may get a little bump in volatility today, but I’ll probably wait another week to see if calm markets persist, then look to get long volatility.

Donald Trump is being sworn in on January 20^th, so perhaps that will be the catalyst for a small selloff and volatility spike?

Thanks for reading.

Twitter:  @OptiontradinIQ

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.