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Staying Active in Low VIX Situations

Jun 15, 2017

By: Sage Anderson

We're almost halfway through the trading year and the VIX has remained stubbornly low through most of that period. 

When the VIX did pop, it appeared to be related to elections overseas in France, revelations regarding President Trump's administration, and OPEC-related activity. 

Interestingly, that isn't a whole lot different than 2016, when "Brexit," the US Presidential election, and OPEC's big production cut seemed to be the main drivers of volatility as well.

While watching the VIX threaten to flat-line this year has felt at times a lot like watching paint dry, sellers of risk have largely had a field day through this extremely complacent period in market history.   

Who'd have thought that the election of Donald Trump as President of the United States would usher in multi-year lows in the VIX? Not many, that's for sure.

While a low VIX generally isn't as attractive to traders, individuals certainly don't dictate the mood of the market. Instead, we collect relevant data and make appropriate and suitable trading decisions to opportunistically generate a positive return - no matter the market conditions.

In that regard, a recent episode of Options Jive may be of interest to the tastytrade community.

 This episode reviews some of the tactics and strategies that have proven effective in low VIX environments. And while low volatility may not seem ideal, the fact that discernible patterns can be inferred from the last 12-18 months of trading is certainly not without value. 

Based on that period of time, it appears that international democratic events involving the US and the EU, as well as global energy demand/supply headlines, have been the top couple items affecting vol. 

That doesn't necessarily mean those same topics will be the only things that move volatility in the future, but it does mean that traders should be monitoring news developments on those fronts routinely - and even looking ahead at the calendar to see when the next one might be scheduled. 

As noted in the aforementioned episode of Options Jive, the VIX has dropped below 10 only nine times in the last thirteen years, and five of those occurred in the last month. An extremely informative statistic regarding the current trading environment. 

Further statistics are provided that illustrate the VIX has tended to bounce after making new lows. Accordingly, the Options Jive team presents three long vega strategies that could potentially be deployed by traders looking to profit from a rise in the VIX. 

Vega is of course one of the three most important "Greeks," and specifically the one that measures how much the price of an option contract will change for every 1% move in implied volatility. Traders that are long premium (i.e. long volatility), are therefore long vega, and want volatility to expand. The opposite being true for short premium, short vega traders. 

The three position structures detailed below are all long vega, and perform well when volatility expands:

As you can see from the above, the three long vega strategies listed involve net long premium positions (i.e. long vega). The long vega calendar structure involves buying an out month (higher premium option) versus selling a near-term option (lower premium option), that performs well if volatility expands over time. 

The debit spreads in the slide above involve buying a closer to at-the-money (ATM) option while selling a further out-of-the-money option (OTM). Again, because more premium has been invested in the long option, versus collected from the short option, the position does best if volatility expands or the underlying moves in the intended direction.

For traders preferring to express a long volatility opinion through the VIX product, the episode also reviews a couple strategies that have also demonstrated high win rates in low VIX environments. Specifically, those positions are long call spreads and short at-the-money (ATM) puts in the VIX. The tastytrade website contains a lot of research on the past performance of these positions if you’d like to review additional information related to the VIX.

Due to the importance of this topic, and its relevance to current market conditions, we hope you'll take the time to review the complete episode of Options Jive when your schedule allows. 

As traders, we can't pick the direction or speed of the market. What we can do is use the data and analytical tools available, as well as the culmination of previous experience, to produce positive returns on capital. 

Despite the fact the VIX has remained low (or because of it), it’s certain there will be plenty of opportunities in remainder of 2017 to deploy high probability positions.

If you have any questions about how to stay active in low VIX situations we hope you’ll leave a comment below or reach out at support@tastytrade.com

We look forward to hearing from you! 


Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.


Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

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