Extreme low vol strategies

T

twentyquid

Hello,
I'm a new trader. Generally speaking I'm looking to trade index options, but when the vols get this low I'm not confident just selling April premium. We're getting close to 30 days from April expiration (when I typically open my monthly trades) and I'm a little confused on the best play here. As I see it I have two theta-positive alternatives:

1) Sell an iron condor and buy a few more OTM puts than usual for vega protection and hope it holds up when vols go back up
2) Buy an April/May calendar or doublediag with a terrible skew against me, which I'm not too keen on. If I'm weighting correctly, the weighted vega of these plays isn't far above 0 anyway.

If I'm going to make a theta-positive play, how do I choose the best index for it?
Is this a time when vols are so low that an index straddle purchase is probably better than any theta-positive play on any of the indices?

Thanks,
twentyquid
 
Quote from twentyquid:

Hello,
I'm a new trader. Generally speaking I'm looking to trade index options, but when the vols get this low I'm not confident just selling April premium. We're getting close to 30 days from April expiration (when I typically open my monthly trades) and I'm a little confused on the best play here. As I see it I have two theta-positive alternatives:

1) Sell an iron condor and buy a few more OTM puts than usual for vega protection and hope it holds up when vols go back up
2) Buy an April/May calendar or doublediag with a terrible skew against me, which I'm not too keen on. If I'm weighting correctly, the weighted vega of these plays isn't far above 0 anyway.

If I'm going to make a theta-positive play, how do I choose the best index for it?
Is this a time when vols are so low that an index straddle purchase is probably better than any theta-positive play on any of the indices?

Thanks,
twentyquid
More...

If you typically sell bounded premium, then there is no reason not to do so in this environment. By selling irons, no matter the vol environment, you've made a statement, financially at least, that you think the underlying will not trend strongly in one direction. Same comment generally for the calendars/straddle-swaps, but because you've got vega in another series to consider, those can be a bit more complicated. Of course, if you add those additional wingstrikes, then the situation is even more complicated.

If instead you're questioning whether vol is informing you of future direction, then you'll have to play that hunch. No clear "best" approach just because vol "appears" to be decreasing or increasing, unless you've had success with choosing market direction. In that case, you should trade the underlying. Because after all, who knows? Maybe VIX goes to 9 from here.
 
Problem with low volatility environments--you don't really know which way things will go. In this environment, options are cheap. Therefore, consider a long straddle. May want to go out to 60-90 days expirations (May or June at this point) to avoid serious time decay. If volatility spikes up, you make money--even if the market doesn't move. If you get a big move in either direction, the trade makes money. This is a tough area to trade. If you decide to do a credit spread, stay well hedged. If a bull put spread is used, make sure your long leg is close enough to the short leg to limit your losses to what you can handle.
 
Quote from twentyquid:

Hello,
I'm a new trader.
More...

"New Trader" and "Options".

Put your money under your mattress and you'll be a much happier person.
 
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