The jump in market volatility observed during the first quarter of 2018 has tempered slightly in recent weeks.  

That reality is reflected in the VIX, which has dropped back to about 13 - once again well below its historical average.

Because we don't know exactly why volatility spiked in the first place, it's hard to rationalize why it has come down, too - that's why at tastytrade we prefer to deploy risk based on probabilities, as opposed to "gut feelings."

Depending on your specific approach to trading, and your current outlook, you may well be considering the addition of some long premium positions to your portfolio given the recent decline in VIX.

It's entirely possible that may be the right move going forward - depending obviously on what ultimately transpires, and how the balance of your portfolio is constructed.

If are looking to learn more about long premium, a recent edition of Market Measures may be of interest. The show explores newly published tastytrade research focusing on the historical success of long premium, and may provide you with valuable perspective going forward.

Long premium, as a reminder, is an industry term for buying options. When investors and traders purchase premium, they usually do so to protect a position, or because they expect implied volatility to increase. Long premium may also be purchased when a big move is expected in a specific underlying.

In the above cases, the addition of long options in the portfolio can significantly boost returns, or help offset losses.

However, traders need to be aware that the probabilities of success for long premium positions are somewhat less attractive than for short volatility approaches. A point that is reinforced on the aforementioned edition of Market Measures.

On the show, the hosts walk viewers through several tastytrade studies that examine the historical performance of long premium in SPY. The data was then parsed a second time so it could be evaluated according to specific market conditions (i.e. high or low volatility environments).

To increase the breadth of the study, three different long premium approaches were evaluated in SPY over the time period from 2005 to present, including:

  • Long straddles

  • Long 30 delta strangles

  • Long 16 delta strangles

The graphic below summarizes the findings of these backtests across all market environments:

Screen Shot 2018-06-06 at 1.02.05 PM.png

As you can see from the above, the average P/L of all three strategies was negative, and the win rates for all three were likewise below 50%.

While that may not come as a complete surprise to long-time tastytraders, the second phase of the study also revealed some compelling insights.

When the data was filtered only for instances in which the VIX was below 15, the average P/L and win rates for all three strategies actually declined when compared to all instances. This phase of the study was somewhat revealing, as most might assume that long premium strategies would have performed better historically when premium got “cheaper” (i.e. VIX < 15).

In order to get the most out of this research, we hope you’ll review the complete episode of Market Measures focusing on long premium when your schedule allows.

For more information on IV Rank and purchasing premium, we also recommend another recent installment of Market Measures which provides further perspective on the same topic.

If you have any outstanding questions about long premium positions, don’t hesitate to leave a message in the space below, or reach out to us at

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.