Sometimes the lack of news is news in itself. (And it's not fake news, either.)
Market volatility in early 2017 appears to have gone on holiday. Or maybe it moved to Canada - along with an unknown number of Americans that were disappointed after last year's Presidential election?
What we know is that the VIX dropped below 10 on February 2nd for the first time in about a decade. What we also know is that as of February 8th, the S&P 500 had gone 81 consecutive days without closing down 1% or more.
Take a minute and let those stats sink in...
The previous streak of at least 81 days without the S&P 500 closing down 1% was also set about a decade ago (2006), and the instance before that was about two decades ago (1995).
Given the lack of movement in equity movements of late, combined with the fact that benchmark equity indexes are at or near all-time highs, it’s hardly surprising that volatility metrics are reading on the low end of the spectrum.
While it may take a stethoscope to find a pulse in the market these days, the nature of such tranquility against the backdrop of a political shakeup in the United States is notable.
We highlighted in a recent blog post some research conducted by tastytrade that provides historical context around the typical behavior of the VIX after it drops below 11.
Short version - it tends to go higher.
And while complacency may be inexplicably creeping into the stock market, it certainly hasn't penetrated the walls of tastytrade.
On a recent episode of Market Measures, the team examined how premium sales have performed in low implied volatility environments. The information on this show is sure to be of interest to those traders looking for ideas when volatility remains depressed over long periods of time.
The centerpiece of the episode is a study that backtests the performance of short premium 30 delta strangles in the S&P 500. The results are isolated into three categories - selling only in low volatility environments (< 50 IVR), selling in high volatility environments (> 50 IVR), as well as selling in all environments.
As you might expect, selling in high implied volatility environments did produce the most attractive results, on average. What may be a little more surprising is that both of the other strategies (selling in low implied volatility environments, and selling in any environment) also produced high win rates (70% or greater).
For the best possible understanding of this material, we hope you’ll take the time to review the full episode of Market Measures focusing on low implied volatility premium selling when your schedule allows.
If you are looking to build on your strategic approach across a variety of market conditions, another previous blog post may also be of interest: “Applying IV Rank to Strategy Selection.”
In the meantime, it’ll be extremely interesting to see what plays out during the remainder of the first quarter in 2017. As always, it’s important to ensure that any position you take in the market fits your own unique risk profile.
If you have any questions or comments, we hope you’ll reach out at firstname.lastname@example.org at your convenience.
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.