Trading in the option can be highly profitable if the market is volatile, however, for the option buyers for option sellers low volatility is more beneficial. As, the option premium price fluctuates at a very high speed when the volatility index (VIX) is very high.

On the other hand, the option premium price remains stable when VIX is low making it difficult for the traders to choose the right strategy for trading. Trading in low volatility becomes difficult for traders, especially for option buyers. So, today we brought here the best option strategies for low volatility that you can apply when the market is trading with low VIX.

What Happens When Market Volatility is Low?

Volatility refers to the potential of price range that can go to high and low during trading. When market volatility is low, the price of the underlying security can be potentially spread out within a limited trading range giving limited room for trading.

Also Read: How to Use Implied Volatility in Options Trading: Strategies

It means the price of the underlying security will not have significant movement in any direction for a short duration (till the expiry). Hence, you need to choose the right optionstrading strategies to trade profitably in a low-volatile market.

Top 10 Best Option Strategies for Low Volatility

Though, most of the options choose to trade with long calls or puts, as these option strategies can generate returns if the market is volatile. If the market is less volatile you need to trade with multi-leg strategies, which are more complex than buying calls and puts. Trading with such complex option strategies will potentially be beneficial for low price movement.

1. Iron Condor for Low Volatility

This option strategy is very popular because of the low volatile market conditions. In this option strategy, you have to sell an out-of-the-money put option and an out-of-the-money call option at the same time and buy out-of-the-money options in both directions to balance the impact of losses.

Also Read: Why People Lose Money in Option Trading: Reasons & How to Avoid

Owing to low volatility, the price movement of the underlying security keeps trading within a specific range allowing a profitable opportunity in trade. The time decay in this strategy will benefit you from the premium you earned from the option selling.

2. Butterfly Spread for Low VIX

This strategy is also suitable for low volatility in which you can earn profits from restricted price movement within a narrow trading range. In this strategy, you have to buy one option with an intermediate strike price and sell two options – one with a higher strike price and another with a lower strike price.

You will benefit from the price hovering around the middle strike price allowing you to earn the maximum profit. However, you have to be very careful while selecting the strike prices and selecting the expiration date of the contract.

3. Long Straddle for Low Volatility

This strategy can be applied when volatility is low. In this strategy, you have to buy the call and put an option with the same strike price and expiration date. You can earn profit from significant movement on either side movement that might happen during the phase of expiry. If volatility unexpectedly increases,the price of one option can offset losses in another.

4. Ratio Spreads for Low VIX

This strategy for low volatility involves entering the long and short options positions in uneven numbers. When volatility is low, you can sell multiple out-of-the-money options either calls or put at the same time you can buy a smaller number of options at near strike price.

Also Read: What is Put Call Ratio & How to Use it for Options Trading

This option strategy for low volatility can generate premium at the same time also allowing the potential profits if the market moves with significant changes. Trading with this strategy will limit your losses when the stock price goes down and also create an opportunity to earn profits with unlimited upside making your trade profitable.

5. Long OTM Call Calendar for Low VIX

This strategy also works during low volatility. Trading through this strategy, you have to buy a long call that will expire in a year. And at the same time, you can sell a further out-of-the-money call expiring within a month.The sold call will expire early giving you a premium to offset some cost from your long-term call. And these premiums can offset a lack of volatility and increase your profitability.

This strategy can work well for you if the stock price beats the short call's strike price and your profit will be limited at this level. However, if your call was uncovered, you would have to exercise the long call and for that, you should have a sufficient number of shares for selling the sell call's execution. Though, short calls are risky option strategies if it is not covered, a covered call will limit your profits and an uncovered short call comes with the potential of unlimited losses.

6. Long OTM Put Calendar for Low VIX

In this strategy, you have to buy a put contract and sell a put contract simultaneously. Some traders expect the low volatility will not remain for a long duration, hence they sell short-term puts to offset the time decay from their long-term puts. The theta in Option Greeks shows how with the passage of time the options lose their value.

The speed of theta decay becomes faster when the option reaches the expiry date of the contract. While the short-term put might expire worthless, reducing the cost of long puts. However, this strategy can provide you with a stable cash flow with the potential to give high returns.

However, this strategy can fail or incur losses if the price of the underlying security goes below the short put's strike price. Here your profit will be limited at the short-term put’s strike price. If youselect the right strike prices that are further out of money you can reduce your risk.

7. Long Put Butterfly for Low VIX

In this strategy, you have to sell two puts and buy two puts at the same time at the same strike price. The long put should have of higher strike price than the put sold and the other long put should have a lower strike price than the put sold with the same expiration date.

The two puts you sold will give you a sufficient premium to minimize the cost you paid for taking positions in two long puts. This kind of combination of trading strategies will help you realize the maximum profits when stock prices trade in a limited range.

8. Short Straddle for Low VIX

In this trading strategy, you will receive a premium from both positions with the potential of maximum upside if the stock price hardly moves. As in this strategy, you have the same strike price and expiration date, then the stock price moves sharply in any direction your loss can increase.

Also Read: Best Option Strategy for Bull Market: 7 Bullish Strategies

In this strategy if you expect the VIX to cool down significantly, as soon as the expiry of the contract arrives, allowing you to keep most of the premium you received on the short put and short call positions giving you the opportunity to earn profits in low volatility.

9. Short Strangles for Low VIX

This strategy is similar to short straddle, but the strike prices on the short put and short call are not the same. However, the strike price of the call is above the put strike and both out-of-the-money and around the middle of the current price of the underlying security.

10. Put and Call Debit Spreads for Low VIX

This is another strategy suitable for low volatility, in which you have to buy a put option and at the same time sell another put option at a lower strike price with the same expiration date. The main motive for trading with this low-volatility option strategy is to earn profit from a moderate decrease in the price of the underlying security.

Here the maximum profit you can earn from this strategy is the difference between the two strike prices, deducted from the net cost of the options. The benefit of this strategy is from low-volatility situations in which there is no significant movement in the price of the underlying security.

While in Call Debit Spread, you have to buy a call option and sell another call option with a high strike price. This strategy is profitable when you expect a moderate rise in the price of the underlying security. In both types of strategies, the upfront cost is reduced and potential losses are limited with the scope of profitability from low volatility.

Summing-up

Apart from these top best options strategies for low volatility, you can also use the long at-the-money put vertical, long at-the-money call vertical and various other levels of advanced options strategiesthat works in low volatility or minor movement in the underlying security. However, iron candour, butterfly spread, straddle and strangle work well in low volatility.

Also Read: What are the 4 Levels of Advanced Options Strategies to Trade

However, trading in low volatility comes with several benefits like steady income, low-risk exposure and preservation of capital. But at the same time, it has some drawbacks like the risk of time decay and you have scope of earning with limited profitability due to low volatility. Here you can choose to trade with the right option strategy with Algo Trading for better results.