Trade Credit Spreads And Make Money In Low-Volatility Markets
Ever wondered how to navigate the challenges of trading options and trading credit spreads in a low-volatility market? Well, you’re in the right place. In this article, I’ll walk you through my approach to trading credit spreads and making money when the volatility index (VIX) is low. Stick around till the end, and I’ll share the actual trades I’ve placed today, offering you a real-time glimpse into my strategy.
Understanding Low-Volatility Markets
First things first, let’s demystify what low volatility in the market means. When we talk about low volatility, we’re often referring to a low VIX. The VIX, or volatility index, measures how much the stock market is moving, often referred to as the fear index. In a nutshell, when VIX is low, options prices are also low, making it challenging to profit from credit spreads. Unlike high-volatility markets, where you can collect more credit and have a wider margin of safety, low volatility requires a strategic shift in approach.
Adapting Credit Spread Strategies in Low Volatility
In a low-volatility market, adjusting your credit spread strategies is key. Typically, I aim for a 30 Delta when trading put credit spreads. However, I need to move my strike prices closer to the current stock price in low volatility conditions. This adjustment is essential because, in low volatility, we can’t go as far out from the stock price while maintaining a reasonable risk-reward ratio. It’s all about finding that delicate balance between risk and reward.
Timing, Sizing, and Strategic Entries
Trading in low-volatility markets requires a keen eye for timing and sizing. The timing of your entries becomes crucial, and I often look for opportunities when the market is showing signs of weakness or strength, depending on whether I’m entering a put or call credit spread. By strategically entering trades during market dips or spikes, I can capitalize on increased option premiums.
Sizing is equally important. In low volatility, where trends are more prevalent, I adjust my position size accordingly. During strong uptrends, I might reduce my position size to around 50% of my normal trading position. This precautionary measure ensures I’m not overexposed if the market shows signs of a reversal.
Real-Life Examples — My Recent Trades
Let me share a couple of trades I recently placed to illustrate my low-volatility strategy. I initiated a put credit spread at 450/449 with a 20-cent credit, aiming for a 30 Delta. Simultaneously, I set up a call credit spread at 464/463, collecting 22 cents per spread. By structuring these trades, I essentially created an iron condor, betting on the market and staying within a certain range. This allows me to profit whether the market moves up, down, or stays in the middle.
Trade Credit Spreads in Low-Volatility Markets
Navigating low-volatility markets might seem challenging, but it can be a lucrative endeavor with the right adjustments and strategies. Remember to move your strike prices closer, time your entries strategically, and size your positions appropriately.
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Thanks for reading 🙂
Austin Bouley
CEO & Chief Strategy Officer
