When implied volatility is low, we will utilize strategies that benefit from increases in volatility as well as more directional strategies.
Historically, implied volatility has outperformed realized implied volatility in the markets. For this reason, we always sell implied volatility in order to give us a statistical edge in the markets. While we often search for a high IV rank at order entry, the market does not always accommodate us. In bull markets, as the VIX drops, implied volatility tends to be low in equities. Just like we take advantage of reversion to the mean when IV is high, we continue to stay engaged and do the same when it gets to an extreme on the low end. For this reason, in low IV, we will use strategies that benefit from this volatility extreme expanding to a more normal value.
Now that we understand the reasoning behind why we put on low IV strategies, it is important to understand the specific trades we look to place. We are more prone to buy calendar spreads when underlyings are at extreme lows in IV. We also purchase debit spreads as opposed to selling credit spreads when we want to make directional plays. Most importantly, in low IV markets, we continue to look for underlyings in the market that have high IV, as premium selling is where the majority of our statistical edge lies.
To reset your password, please enter the same email address you use to log in to tastytrade in the field below. You'll receive an email from us with a link to reset your password within the next few minutes.
Register today to unlock exclusive access to our groundbreaking research and to receive our daily market insight emails.
Sign up for a free tastytrade account to download the slides and you’ll also receive daily market insights from our experts and a roundup of our best shows from each day.