Trading volatility successfully requires an understanding of prevailing conditions in the market, appropriate positioning, and prudent risk management.

If you've been actively trading through the summer of 2016, you know that volatility started out extremely low.

Some of the statistics that help illustrate this point include:

  • A mean value of ~12 in the VIX for August 2016 - the lowest for the month of August since 1994

  • A streak of at least 33 days in the S&P 500 without a move of 1% in either direction (open to close) - the longest such streak since 2014

  • Fresh all-time highs in the S&P 500, Dow Jones Industrial Average, and Nasdaq

If the above has you wondering about low volatility regimes and how you might consider positioning your portfolio, a recent episode of Options Jive may be right up your alley.

This particular episode features a study that examines how short premium straddles in the SPY have performed during periods of low, medium, and high volatility - as compared to the average for all volatility environments from 2005 to present. Given that volatility spiked after Labor Day - such a comparison is certainly timely.

As presented on the show, the study isolates periods when Implied Volatility Rank (IVR) in the SPY was:

  • 0-24% (low)

  • 25-49% (middle)

  • 50-100% (high)

  • All environments

The study then backtested selling at-the-money (ATM) straddles with approximately 45 days-to-expiration (DTE) and managing the positions at 25% of the credit received (either profit or loss).

As you can see in the graphic below, the win rate was highest during periods of low IVR (0-24%), but it also resulted in the lowest average daily P/L:

The chart above likewise shows that low IVR periods in history also suffered the lowest average losers. Results from the study therefore suggest that low volatility periods can be just as attractive as any other period for deploying a short premium-biased strategy.

In the later portion of the episode, another group of statistics from the study are unveiled that help traders better understand the potential risks they face in each respective IVR category.

The metric used to illustrate an important risk consideration is “the percent of time that IVR increased after 45 days” during each period (low, medium, high). This particular cut-away of the results demonstrates that “low” IVR periods in SPY do expose short premium positions to the greatest risk of an expansion in vol.  

This isn’t necessarily surprising - that volatility has the best chance of increasing when it is at relative lows. The fact that the average loser was the largest during periods of “high” IVR would also be somewhat expected due to the fact that these types of markets tend to experience bigger moves (i.e. multiple standard deviations).

We recommend watching the entire episode of Options Jive focusing on short premium positioning across different volatility regimes when your schedule allows.

A closer examination of the topics presented in this episode may help you optimize your strategy, positioning, and approach to risk management no matter the prevailing market conditions.

Please don’t hesitate to reach out support@tastytrade.com with any comments or questions.


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.