How to trade options when volatility is low
Till then try to maintain consistency. Before applying IV, it is better to understand fr wht the Volatility is refered. Generally, High Volatility signifies greater price movement on any direction, Upside or Downside. Just think frm the point of view of handling big money. Low Volatility signifies lesser price movement on any direction, Upside or Downside.
Now applying this to Options, taking ur strikes as example, Call has less IV in comparision, meaning Low Volatility, signifying No quick price erosions, thereby leading to Buying. Coming on to trading Options, whr the Retail trader lose in Option buying is whn not taking note of IV changes.
This IV data changes are hard to get, in continuous manner. In this age of fast computer trading, if any algorithm senses High IV in comparision, they eat the option premium like anything, before Retail trader can react.
Recently the downward trend in volatility has been especially pronounced in equity markets. On May 8 this year, the Vix marked a long-term low at a level of 9.
Volatility levels of various asset classes have been declining. This may seem surprising at first, in light of the current situation:. What this indicates is there are enough reasons to justify high volatility. Therefore, there must also be reasons for the markets' current calmness: Market participants have become accustomed to central banks' interventions once markets start shaking too much. Therefore any rise in volatility is immediately stifled by additionally injected liquidity.
This rarely triggers short-term peaks in volatility. Recession and market turbulence are common associations in the context of volatility. Paradoxically, many market participants become nervous just when the very indicator of market nervousness — market volatility — trades on extremely low levels.