Trading high volatility has a number of advantages when looking to sell premium.
Fear in the markets encourages both investors and traders to buy protection against losses and the increase in demand leads to higher prices which results in increased opportunities for premium sellers. A chart of the SPX and the VIX makes this clear. Sharp sell-offs are accompanied by a boost to IV.
There are distinct opportunities to a high volatility environment. The primary ones are higher option premiums to sell, higher probability of profit, wider breakeven points and the ability to sell options that are further out-of-the-money.
Since there is high volatility now, the tastylive research team ran a study to contrast higher volatility periods versus lower volatility periods. A study was conducted from 2008 to present. Measurements were taken at the first of every month using the option closest to 45 days to expiration. It recorded both put and calls strikes at 1 and 2 standard deviations (SD). It measured various metrics when the VIX was above and below its average ($22.31) over that period . It measured the width between the put and the call at different volatilities to show the impact of different volatility levels.
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the results of the study and to see how fear and an increase in volatility provide an opportunity for premium sellers.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.