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The options strategist has different factors to consider than the pure stock trader. The directional options trader has to be a good timer as well as knowing whether the options are cheap or expensive in other words reading the implied volatility environment. The options strategist has to factor in time decay and also think about the impact changes in volatility can have on the overall position. There are certainly specific strategies that work well in a low implied volatility environment.

In a bullish low implied volatility market, the most commonly used strategy is the long call. By selecting a long call option, the strategist is purchasing the right to buy the underlying asset at a specific strike price until the expiration date. Call buyers have unlimited potential to profit on a rise in the price of the underlying equity and risk is limited to the premium paid for the option. Understanding that call options increase in value as the underlying stock or index move higher is not enough, however. The options trader also needs to understand how changes in implied volatility can impact the position.

The same factors and concerns apply if the options strategist is bearish and using a long put in a low implied volatility environment. The bottom line is whether long puts or calls, the best time to buy options is when they are cheap. For instance, buying calls during periods of low volatility is a great way to get bullish on a stock for a low premium price, while buying puts on low volatility is also a great way to play a stock that is likely to head down.

For those times where the options strategist expects a big move in an underlying stock but is not sure of direction then the straddle strategy might be an appropriate strategy, especially in a low volatility environment. The straddle is a great tool for creating a position on a stock where the future direction is uncertain. It consists of the simultaneous purchase of both a call and a put at the same strike prices, with the same amount of time to expiration.

If the stock makes a big move higher, the call will appreciate and begin to yield profits. If the stock declines, the put will increase in value and the strategist will make money on the put options. A very important factor to consider, however, is the volatility of the options before initiating the trade. The most effective straddles are entered into when implied volatility is low.

Other strategies that perform well when a low implied volatility environment is identified include bull call spreads, bear put spreads, call ratio backspreads, put ratio backspreads, strangles and some calendars. When operating in a low implied volatility environment be sure that you are selecting these particular types of strategies to give your position the best possible chance of becoming profitable.

Happy Trading.


Jeff Neal
Senior Writer, Options Strategist & Profit Strategies Radio Show Market Correspondent
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Listen to Jeff at www.ProfitStrategiesRadio.com

Low Implied Volatility, Calls, Puts, Call Raito Backspread, Put Ratio Backspread, Options, Bull Cal Spread, Straddle, Strangle, Bear Put Spread

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