How to Invest in Low Volatility Markets - Trading with the VIX under 15

[Music] Thomas Trebek my friend oh we are even the ESPYs down to 50 close all watertight doors stop yourself can you move that bottle behind you use it sure yes nobody can see it okay until you mention it that's Windex the preferred window this prefered cleaner of the tastytrade organization they do a product placement now that is they're basically crashing like I feel like when they go from up $3 to down $2 we've crashed mm-hmm right exactly VIX is up 1% in the middle of this so-called crash ready bet I am sir we have a segment here that's going to twelve slides on the VIX oh my god I was gonna kill me today thirty years of trading I didn't look at volatility in the VIX now of a sudden every day I gotta look at it every day VIX below 15 VIX below 15 what do you think this is about this is about low volatility well we get so many questions you don't listen by the way the timing is only perfect that we do VIX below 15 and the VIX never trades below 15 again for the rest of the year mm-hmm so that's why we're doing this that's one of the reasons the other reason is because we get a ridiculous number of emails that suggest in periods of low volatility help me help me can't find trades can't find stuff to do help me help me help me in 2013 the VIX has been under 15 and all but two trading days as we spent the last two days talking about how this reduces our pot odds today we drill down deeper bet on what we can do to adjust our trading to accommodate this environment hey it's fair we've you know if you think about the number of times that we're we always talk about 15 being that kind of that mean number but over the last couple of years you know I would say like 20 seems like it's more the the new 15 sure and then every time you get there and you do a you know you give a lecture you talk to somebody who's asking questions about the market so you say 20s and fifteen the next thing you know you're a 15 so never changing that again you'll you also said 56 was the new 25 early this morning in the new 27 okay but it's all about age yes but 15 is the new 15 with respect to Vicks hmm so let's go next time we begin with probability theory since all our models rely on a distribution curve how does the low-volatility environment affect the curve god I wish I had known this 20 years ago but let's go tear so there you go there you see low end by implied volatility high implied volatility now where would you rather be okay if you could let's just say well at first glance you're not really sure right I mean if you look at the low volatility that's the one that's pointing straight up your window of opportunity is much smaller it shows that you know you can have a higher probability being if we don't move but that's really not what it's showing there it's showing you your range you would want the larger range the higher volatility the blue one the lower wider one kind of like Tom so so let's talk about this cuz I was gonna be nice and not mention you but now I'm gonna mention I'm the taller one if you notice any of the pictures were already together I am the low-volatility environment taller more statuesque tom is the shorter squatter more wide higher Ivy and in this case when you're trading you'd rather be with Tom but you want to go home with me the low volatility yes go ahead are you done yes if it was raining out and we only had one place to go okay think about this it was raining out we only had one tree to go hide under so we didn't get wet which tree would you choose the brown tree or the blue tree the blue tree okay and the reason you choose the blue tree is I'm not gonna talk about your weight like that I'm saying the reason you choose the blue tree is because we could both fit under the blue tree have more room to run we can frolic under that blue tree so more place to hide that's right under that blue distribution curve we can just we can live we can play we can do lots of things hmm under the brown tree under that brown tree it's not a lot of room and as implied volatility drops you just don't have a lot of room to play as implied volatility expands you have a lot of room to play let's go next slide look at you how disciplined you are taking profits now isn't that scary 46 is 40 ticks and and to our Bob subscribers that on every on everyone contract I throw a little bone out there 50 dollars for 10 or what have $200 for 40 um 4 for 40 points right oh so so as you can see in a lowball environment the distribution curve is narrow we did make 40 points yes yes yes stop yes so I was right yes this makes your one standard deviation range much tighter in a than in a high bounce of environment so when we sell one standard deviation out of the money premium we take more risk for less return let me say this again because we were rudely interrupted as you can see in the lowball environments the distribution curve is tall and narrow okay tall and narrow this makes your one standard deviation range much tighter in a much tighter than in a high-volatility environment where it's normal distribution the order seems like strong Lister's so what we sell once a deviation out of the money premium okay we take on much more risk if we tighten that curve for less return so more risk less return doesn't seem to make a lot of sense and unfortunately that's the situation we put ourselves into okay since the strikes are so close to the stock price due to the low implied volatility are we fooling ourselves by relying on these probabilities no the probabilities are accurate and the reason they're accurate is because there's a two-sided market but they're only accurate as always at the time of trade entry right so one site two-sided mark that's right so once the trade is made and IV changes so do the probabilities hey there are lots of times in life when you're gonna do things you're gonna go like that person sell that there because that was the market and it's not gonna be just trading you're gonna some day you're gonna buy a piece of property you're gonna go wow I just scooped the bottom even though you may not have but you're gonna think you did why would they sell it there and at the same time the other person is gonna look and say how I the hell would they pay that yeah you don't know all the answers but that's a fair that's a fair market that's right have that environment that's right fair market that's right so it's not unlike when you walk into a car dealership and you say yourself I know I'm paying up for this car that kind of thing well or when or when or when you say I the guy says I want 32,000 for the card you see I'll do 31 this he'd done exactly right by selling premium so close to the stock price we turned pot odds against us IV mean reversion implied volatility mean reversion which we know will happen at some point in the future will work against us the following looks at how IV implied volatility affects the one standard deviation range and how an existing strain probability are affected by an implied volatility change this is really important so of course we're gonna archive this but just take a good look because this is this is this sums up a lot of what we talked about one single slide can we quantify how implied volatility changes affect our probabilities so IBM's a two to two hundred dollars this is the example we're using it's just an example 50 days to expiration and you can see right here the implied volatility on the left hand side of the page which is currently 15 okay and and you're just giving yourself on the right hand side you'll see the range and sometimes we'll say things like hey you know what implied volatility in IBM is pumped it's at 30 and you go a big deal what does that mean well it means it's double you have a double the range and you had one of the implied volatility was echo if you've told me back to that graph that you showed her that picture that you showed on the second slide there you have the 15 Val right now would be the higher now or lower vowel and the 30 vowel would be the wider hi Val so let's put this entry as you put it let's put this into perspective of the way we trade IBM goes to two hundred eleven dollars makes a new high okay we get short a put spread we buy the we buy for example the two ten to fifteen put spread in April because we think the stock has come up towards a level where we think implied volatility may go higher finally okay if as soon as as soon as we believe implied volatility goes higher the the the potential advantage for us at that point is that we can expect a much greater move in the underlying so all of a sudden all the pricing around the derivatives gets different there there's there's a little bit of logic in B there's a lot of logic and being contrarian when and different levels of implied volatility get to extremes you can buy you can make a directional bet when you think implied volatilities at the extreme low end of the range and you can make a premium bet when you think implied volatilities at the extreme high end of the range because there's an incredible payout pot odds wise if you're right meaning the speed which should be paid out is so much greater that's all this very good because nobody actually knows what's gonna happen okay and then you can see the difference you can see the put strikes the call strikes for the one standard deviation move and you can see the range on the right-hand side of the page and this is a great example of just being able to add some predict add some definition around implied volatility pot odds and trading range let's go next slide so here you can see IBM 200 here is the 90 to 10 strangle and there's the different implied volatilities and here's the probability of out of the money out of the other the position being out of the money so at 15% implied volatility where it currently is there's an 80% chance this works but if volatility was to go to 30% there's only a 66% chance that it works so if you think volatility is at the low end of the range the reason you don't sell iron condors or strangles or whatever else it is is because if volatility pops you're gonna go from an 80% probability success to a 66 percent probability success the reason you sell all this crap has a opening trade when volatility is expensive is because as soon as volatility contracts not only do you make money because your assumption was right but you make money at the speed of the contraction good point okay let's go to the next slide you just try to put all the things that can work for you in your camp right that's right listen why why wouldn't you I mean that's what we do knowing all this do we abandon trading credit spreads in this type of environment absolutely not remember that we were in a low violent for almost all 2004-2005 there's money to be made but you need to adjust your strategies need you're just your size you need to adjust your strategies because you're almost more directional than anything else mm-hmm okay let's go next one since implied volatility is low causing premiums to be small should we move our stripes in closer to try to increase the amount of premium that we receive let's take a look at this because that would be the logical question right as our studies of the last few days show we should do just the opposite though it seems counterintuitive we need to move our stripes wider higher probability expiring out of the money to account for some of the IV reversion to the mean I am a hundred percent at fault I did not know this this one thing's when I say we learned stuff everyday I I read I watched yesterday's market measure read through it two different times afterwards I'm like and I'm thinking to myself my god I make this mistake every freaking day I because implied volatilities lo Tony I was trying to sell more directional premium and I was doing exactly the wrong thing correct and I'm like and I was like I talked to Al about this I'm like this it's crazy because this study just we just invalidated everything I said like two days ago about try to collect more premium mm-hmm and I'm like I know he does I do we didn't realize the stuff it's it's the stuff that we're learning on the show just for ourselves it's kind of incredible because I don't think anybody would really it doesn't make a lot of sense no it does intuitively you're not thinking that way and and so I love this stuff just for that reason so I need to collect less go further out of the money and just wait until a little bit - which is something we always do and wait till applied volatility just decides to accommodate us tomorrow we look at continuing discussion on the VIX below 15 and we'll look at more practical steps to take with our trading correct boy that was good and what's cool about it is not only is it the validation but it's the it's the repetition of doing these things on this show these are things that nobody else the world we ever talked about who would talk about going wider to take in less credit to reduce your problem to increase your statistical chance of success and be able to validate that with years of historical study because that's the important thing very good and and have that strategic it still fits into that a strategic Jerian random the whole thing interesting S&P is down 375 Russell futures down to 40 they are not looking strong Nasdaq self 75 cents and the Dow is only down 11 dollars I wish it was a lot weaker Tony some of the stocks that we trade this is what we've been waiting for at least the decoupling between Apple so Apple the start of things I don't know if this is the move I've been waiting for but yes this is the start Apple Facebook CLF those are all up today and see anything else hmm no okay JCPenney unchanged which helps your strength IBM's on a buck Johnson Johnsons finally down a little bit if we could just get to kick Yahoo around a little bit yes yeah let me be filled with a curb yes please to take care of that for me I will do my best to get because Yahoo does need to be kicked to the curb crying out loud I have purple in their logo I totally agree and maybe well well as we're starting to see the Dow actually get a little bit stronger here I'll make some decisions and you know with respect to what I want to do there um it's 8:58 we got the ex trader in the house ready that's right I am sir Justin's a big boy table too right oh well he's got big big boy hands back in 90 seconds does it get taste oh I taste Street Network [Music]

Channel: tastytrade

Views: 62,048

Rating: 4.8811879 out of 5

Keywords: Volatility, Implied Volatility, Trading when Volatility is Low, Pot Odds, Trading Range

Id: oETupU86PDY

Length: 14min 51sec (891 seconds)

Published: Thu Apr 04 2013