Market Doldrums? Five Options Strategies for Low-Volatility Environments

Explore five options strategies designed for low-volatility markets, including two bullish, two bearish, and one neutral, to help traders adapt their strategy.

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5 min read
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Key Takeaways

  • Lower market volatility can prompt a change in strategy for option traders
  • Debit strategies with positive theta can be useful in low-volatility situations
  • Consider two bullish, two bearish, and one neutral options trades for low volatility

The stock market ebbs and flows—not just in price, but also in volume and magnitude. Some periods are highly volatile, with lots of price action and price fluctuation. Some would call these markets exciting, while others would call them nerve-racking. Several options strategies are designed for such volatile trading environments.

Other periods are quite the opposite. When volatility is low, things can seem dull. Stuck in the mud. In the doldrums. Think holiday markets and the dog days of summer rolled into one. Some options strategies are designed for such markets. But before we continue, a note of caution: There are no guarantees with these or any trading strategies. When options prices are relatively cheap, it’s typically a reflection of low price action and a calm market.

5 options strategies for low-volatility markets

In general, lower volatility usually means lower options premiums. That can make credit strategies (those in which premium is collected up front) less attractive—but all debit strategies are not created equal. 

Here are five options strategy ideas designed for lower-volatility environments: two bullish, two bearish, and one neutral. 

1. Bullish strategy: Long at-the-money (ATM) call vertical

Options risk graph for long at-the-money vertical spread
Long call vertical risk profile. For illustrative purposes only.
  • Structure: Buy a call that’s one strike in the money (ITM), and sell a call of the same expiration that’s one strike out of the money (OTM)
  • Capital requirement: Usually somewhat lower and depends on the difference between strikes
  • Risk: Defined

With this strategy, traders can consider creating a vertical where the debit is less than the perceived intrinsic value of the long call. That will make the time decay, or theta, positive for this debit position. When trading, it’s important to consider maximum gain versus maximum loss. In general, with this strategy, maximum gain is equal to the spread between the two strike prices being considered, minus the debit paid. On the other hand, maximum potential loss is usually limited to the net debit paid. A trader might consider looking at expiration dates 30 to 60 days out to give the position more duration. Maximum profit is usually achieved close to expiration or if the vertical becomes deep ITM. Some traders take less than the maximum profit ahead of expiration if they can.


2. Bullish strategy: Long OTM call calendar

Options risk graph: Long OTM call calendar spread
Long call calendar risk profile. For illustrative purposes only. 
  • Structure: Buy a back-month OTM call, and sell a front-month call of the same strike
  • Capital requirement: Lower
  • Risk: Defined

Because calendar spreads maximize their value when the stock is at the calendar’s strike price near expiration, this bullish strategy has an “up to this price, but not much more” bias. Lower volatility can make calendar debits lower. Buying one longer-term call and selling one shorter-term call offers limited gain potential, while limiting losses.

One strategy is to look for a short option between 25 and 40 days to expiration and a long option between 50 and 90 days to expiration. Some traders look for a calendar that can be profitable if the stock stays at its current price through the expiration of the front-month option and has approximately 1.5 times the debit price for max profit if the stock is at the strike price at expiration. 

Essentially, your maximum gain will be realized if the underlying price is the same as the strike price on the shorter-term call’s expiration date. On the other hand, the maximum potential loss equals the spread.

3. Bearish strategy: Long ATM put vertical

Options risk graph: Long ATM put vertical spread
Long put vertical risk profile. For illustrative purposes only. 
  • Structure: Buy a put that’s one strike ITM and sell a put of the same expiration that’s one strike OTM
  • Capital requirement: Lower
  • Risk: Defined

It’s possible to create vertical spreads where the debit is less than the perceived intrinsic value of the long put.6 That should make the time decay positive for this debit position. Traders might consider looking at expiration dates 30 to 60 days out to give the position more duration. Maximum gain is usually defined by the spread between strike prices, minus the net premiums paid on the trade. Maximum loss is usually limited to the net premium you pay on the trade. Maximum profit is usually achieved close to expiration or if the vertical becomes deep ITM. 

4. Bearish strategy: Long OTM put calendar

Options risk graph: Long OTM put calendar spread
Long put calendar risk profile. For illustrative purposes only. 
  • Structure: Buy a back-month OTM put, and sell a front-month put of the same strike
  • Capital requirement: Lower
  • Risk: Defined

Because calendars maximize their value when the stock is at the calendar’s strike price near expiration, this bearish strategy has a “down to this price, but not much more” bias.

Put calendars can potentially benefit from an increase in volatility if it increases on a drop in the stock price. When considering maximum profit, you’re more likely to see it if the price of the underlying for the shorter put is higher than the strike price when establishing the position and the price falls to the strike by the expiration. Maximum potential loss is the debit paid.

Traders might consider looking for a short option between 25 and 40 days to expiration and a long option between 50 and 90 days to expiration. Look for a calendar that can be profitable if the stock stays at the current price through the expiration of the front-month option and has approximately 1.5 times the debit price for maximum profit if the stock is at the strike price at expiration.

5. Neutral strategy: Short straddle

Options risk graph: Short straddle
Short straddle risk profile. For illustrative purposes only. 
  • Structure: Sell an ATM put and sell an ATM call
  • Capital requirement: High
  • Risk: The risk of loss of a short straddle is unlimited; naked options strategies involve the highest amount of risk and are only appropriate for traders with the highest risk tolerance

Shorting an ATM call and put can generate a large credit even in a low-volatility environment. However, it requires greater confidence that the stock price won’t change much between now and expiration. In general, the maximum profit possible from a short straddle is the premium received. This is achieved if the underlying happens to be trading at the same price as the strike on the expiration date. It’s still possible to be profitable when the underlying is at a different price than the strike, but the profit is smaller because the trader only receives the full credit if the options expire worthless.  

A trader might consider selling options closer to expiration (between 20 and 35 days) to maximize positive theta. A trader can also consider buying back the short straddle before expiration if profit is available.

Let’s face it: Periods of low volatility can be, in a word, boring, especially if you’re an active trader who thrives on price action. But when low volatility rears its head, and the trading screens resemble paint drying, experienced option traders can consider these strategies as a way to seek opportunity amid the lull. 

Doug Ashburn is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.
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Key Takeaways

  • Lower market volatility can prompt a change in strategy for option traders
  • Debit strategies with positive theta can be useful in low-volatility situations
  • Consider two bullish, two bearish, and one neutral options trades for low volatility
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