Trading in a low volatility environment is like looking for that needle in a haystack. Under normal circumstances (in a higher volatility market), we look to make 50% of maximum profit potential in defined risk trades like spreads. If we sell a spread for $1.00, we want to buy it back at $0.50. In undefined risk trades such as strangles, our goal is closer to 25%. In a low volatility market such as the one we are in, adjusting our goals down isn’t totally out of the question.

We want to strike when the iron is hot. But sometimes the iron doesn’t get hot, so...we gotta strike when it’s lukewarm.

Expected moves in the market or individual underlying equities is based on implied volatility. When IV is low, we know trading ranges are going to narrow. That in turn leads to lower levels of premium in options. In periods of high IV, those ranges widen causing premium to become more rich.

Remaining mechanical is part of what makes for successful trading. Criteria for what we are willing to trade never changes. We also have to work with what the market is giving us. If that means taking profits at 40% or 45% in a defined risk trade or 20% in an undefined risk trade, that’s okay.

Volatility influences everything, including how aggressive we are with trades. High IV offers better opportunities. “Vol crushes” following a period of high IV accelerate premium decay, helping us reach those profit goals we so often discuss. When there is no premium to crush; however, taking our profits a little sooner can make a lot of sense.


Josh Fabian has been trading futures and derivatives for more than 25 years.

For more on this topic see:
WDIS | Back to Cool: Selling Verticals in Low Volatility - May 29, 2014
Best Practices | Low Volatility Strategies - June 1, 2015