We haven’t seen these low levels of CBOE Volatility Index (INDEXCBOE:VIX) many times in recent years.
The $VIX is currently trading at 11.26 and has only been lower 3 occasions in the last 12 months.
While we may not see a spike in volatility today, next week or even the week after, rest assured it will come at some point.
Opening short volatility trades when the $VIX is this low can be fraught with danger.
If volatility stays low, strategies like iron condors might prove to be very profitable, but it won’t take much of an uptick to quickly place these trades under pressure. The problem with such a low volatility environment is that the short strikes have to be placed so close to the market.
That leaves little room for error and even a 2% move in the underlying can begin to put an iron condor under pressure.
Two other periods in 2016 displayed extended runs of low volatility. The first being from mid-March through to the end of May. The $VIX stayed below 18 during that 11-week stretch.
The second period was from mid-July though to early-September. That 8-week run saw the $VIX stay below 15.
The current run of low CBOE Volatility Index (INDEXCBOE:VIX) has been from mid-November through to mid-January. That’s approximately 8 weeks or so.
Calm markets may persist for another few weeks, but after that I imagine there will be something that causes panic to set in again.
I’m not calling for a major panic, but expect to see a $VIX spike up to 20 or so some time between late-January and the end of March.
We have Donald Trump being sworn in on Jan 20 and also earnings season starting, so there are two potential catalysts right there.
To get long CBOE Volatility Index (INDEXCBOE:VIX), I like to use Long Strangles. I’ll typically go out about 6-9 months to reduce the effects of time decay.
I’ll hold the trade for around a month and hope we get a wild swing in that time. Sometimes I’ll hedge out the Delta by buying or selling stock so it becomes a pure volatility play.
Note: Gavin has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. He likes to focus on short volatility strategies. Gavin has written 5 books on options trading, 3 of which were bestsellers. You can read more from Gavin at Options Trading IQ.