The New Bull Market Is Where Most Investors Aren’t Looking

The New Bull Market Is Where Most Investors Aren’t Looking

Bull market in volatility

Bull Market in Volatility

Yesterday I wrote a little about the heightened levels of implied volatility that we are witnessing in the market. And how a high IV environment offers those that trade options the ability to start selling inflated premium.

The IV rank graph below shows just how high volatility is at the moment in comparison to the last 10 years.

Realistic Strategies, Realistic Returns

Join Cabot Options Institute Masters Club and make money in all markets — up, down or sideways.

Andy Crowder quit a lucrative job on Wall Street so that he could share his expertise with regular investors – instead of super-rich investment banks and hedge funds.

Today, he publishes four different specialized options services for Cabot Wealth Network.

When you join Cabot Options Institute Masters Club, you get all four, at half the price of each separately!

These services each offer a safe way to generate reliable returns – based on statistical likelihoods that give you an 80% chance of success.

Make Money in This Market

Typically, when the IV graph is shaded pale green or higher, options selling strategies become far more appealing. But when we see IV rank pegged, like it is today, well, it’s time to open up the playbook.

10-year-chart-SPY-IV-Rank

Now, I use options selling strategies almost exclusively. Yes, I will use debit spreads from time to time, but my true focus relies on having a statistical advantage with each and every trade I place. Therefore, options selling strategies remain at the forefront of my quiver at all times.

And now we have a bull market in volatility, which directly impacts options premium, to the benefit of options sellers. And should go without saying that the best way to take advantage of the inflated premium is to use options selling strategies.

Let’s do a quick comparison between options premium during normal levels of volatility and heightened levels of volatility. This will allow you to see the true benefits of using options selling strategies when IV is above normal levels.

The images below represent a snapshot of the option chain going roughly 50 days until expiration (dte) S&P 500 ETF (SPY) during low levels of volatility versus today’s high levels of volatility.

August 30, 2018

The VIX was 13.53 at the time. SPY was trading for 290.30.

As you can see, options premium is significantly less due to the low implied volatility in SPY. Yes, SPY was trading for less than it is now, but options premium, is only going for approximately $4.20 to 4.25. Extrinsic value is $3.925.

Options-IV-august-2018

January 26, 2022

The VIX was 31.96. SPY was trading for 433.29.

As you can clearly see, options prices are significantly higher at $15.37 to $15.44.

Look at the extrinsic value, or options premium as well.

Extrinsic value is the difference between the market price of an option, also knowns as its premium, and its intrinsic price, which is the difference between an option’s strike price and the underlying asset’s price. Extrinsic value rises with an increase in market volatility.

Extrinsic value in the Mar 18, 2022 438 call strike with 51 days left until expiration is $15.405.

Prices are inflated across the board. This is what happens when volatility reaches higher levels and why we always want to use options selling strategies during these periods.

Options-IV-january-2022

It could be argued that we could be in the early stages of a bull market in volatility. Since the pandemic hit the market, IV has been significantly higher than the previous nine to ten years. The market had become complacent. And even though I was still selling premium during this period, the opportunities weren’t as plentiful.

Times have changed.

IV-volatility-SPY-VIX

The VIX has now found a base at 15, not 10. Doesn’t seem like a lot, but on a percentage basis it makes a huge difference on how it impacts options premium. And you can clearly see from the examples above the impact of heightened levels like what we are seeing at the moment.

Bull markets in volatility tend to last 5 to 8 years. One thing is for certain, I sure hope it comes to fruition.

As always, if you have any questions, please do not hesitate to email me or post a question in the comments section below. And don’t forget to sign up for my Free Newsletter for education, research and trade ideas.

Comments

  • Hi Andy:
    I’m sure you noticed that IV is more than twice historical volatility, even higher at the edges of the “smile.”
    How does that figure into your strategy?

  • I had never really paid attention to IV or VIX when doing CSPs throughout 2021. Need to study this and whatever tools needed to turn things around. My account had taken a beating this few weeks. I need to come up with a more consistent trading plan going forward

    • Feel free to ask as many questions as you wish as you peruse through either the content here or elsewhere. IV rank and IV percentile are wonderful tools wen using options selling strategies with a high-probability of success.

  • Hi Andy,

    Very insightful articles – I’ve followed and subscribed to your newsletter.

    Just a question – I have been trading options for a few years now and find that I am not able to scale the position sizing correctly. How do you manage position size? When you say 1% to 5% does that mean the maximum loss on a credit spread? What about if we are trading naked options?

    • Jan,

      Thanks for the question and kind words. My position-six his simply the amount of capital I have allocated per trade. The 1% to 5% is defined by the max loss if using a risk-defined strategy like a credit spread. As for a naked strategy, you would define it either through overall capital allocated, or through a defined stop-loss. I hope this helps. Thanks again.

You must log in to post a comment.

Enter Your Log In Credentials

This setting should only be used on your home or work computer.

Need Assistance?

call Cabot Wealth Network Customer Service at

1 (800) 326-8826