Are you struggling to find profitable trades in a low volatility (IV) environment? Do you typically sell premium but find it less lucrative when options are cheaper?
You're not alone. I also face this issue, and it can be frustrating to see your usual strategies yield lower returns. Selling options in low IV conditions do not give us the edge we're used to. The premiums are lower, and the opportunities for rolling out for credits are fewer. This is why we need a different approach to thrive in these market conditions.
At Good Kids Trading (GKT), we've always emphasized selling premium in high IV environments because options are priced higher, which benefits sellers. However, low IV environments are a good time for you to consider a strategy we don't talk about quite as much. Let me share a different perspective on how buying options help us achieve success.
When volatility is low, options are cheaper since there's less fear and uncertainty priced in. Remember, options have intrinsic and extrinsic value. We're paying for time and fear:
So if fear (implied volatility) is less, this is the perfect time to consider buying options rather than selling them. But it's not as simple as just buying anything.
Here are 5 keys I consider when buying options:
1. Trade Hypothesis: Develop a strong conviction that a stock is about to move. This could be based on a favorite chart pattern (that link is 7 of my favorite chart patterns), a stock gapping down on great earnings, or a contrarian trade with limited risk.
2. Options Chain: Ensure the stock is fairly liquid. Avoid options with no open interest or wide bid-ask spreads. Liquidity ensures you can enter and exit positions easily. Pay attention to open interest and if the bid ask spread is tight.
3. Time Management: Buy options with at least 30-45 days to expiration (DTE). Options with less than 21 DTE suffer from accelerated theta decay. While longer DTE options cost more, they give you a better chance to capture the expected move before time decay erodes the premium.
Do you see how time decay accelerates the closer to 21 DTE:
4. Types of Trades: Depending on your market outlook, you can buy:
Long Calls if you anticipate a bullish move.
Long Puts if you foresee a bearish trend.
You can also explore advanced strategies like
Buying Spreads (so buying an option and selling an option at the same time)
Buying LEAPS- are call options with expiration dates longer than one year.
Poor Man's Covered Calls- buying LEAPS and selling a short-term call option against it.
ZEBRA spreads - buying multiple in-the-money options and selling one out-of-the-money option to create a position with nearly zero extrinsic value
5. Risk Management: Understand that buying options involves a fixed maximum loss—the premium you paid. However, if your trade hypothesis is wrong, these losses can add up, unlike owning shares of stock where you have residual value.
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At GKT, we provide tools, resources, and insights to help you navigate these shifts in strategy. By adopting a buying strategy in low IV environments, you can maintain profitability and stay ahead of the curve. Our comprehensive guides and expert tips will support you every step of the way.
Don’t let low IV environments stop you from taking any trades. Embrace this opportunity to learn and adapt your strategies. For more detailed guides and to see me trade in real time join our community's discord of traders who are mastering the art of buying options in any market condition.
Happy trading, Good Kids!
-$Maxwell
I understand the stock market can feel intimidating and complicated, if you want some extra support and guidance, I help people skip levels, schedule a free discovery call with me. Lets talk stocks and see if I can help you! Click on the image below and setup a time that works for you!
This is not trading advice, it's for your education. I'm a dude on the internet who’s been trading for 2 decades, and I use the stock market as my primary source of income. None of this is financial advice. Any trades or decisions you choose to make are at your own risk, this is purely educational!
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