Low Volatility Option Strategies (SPX Put Credit Spreads)

you've probably heard that the best way to make money selling options such as credit spreads is that you want to look for stocks or ETFs that have higher volatility the problem with that of my advice is that volatility has been really low for several years now and if you're waiting for volatility to rise too much to place a trade and you probably be waiting around for a long a long time now what some people end up doing is they'll go to higher volatility stocks which still makes sense for credit spreads but you got a deal with a lot of additional things when you're trading those type of stocks you got a lot of whipsaws choppiness and you got to deal with earnings and all that kind of stuff as well but if you're an index option trader like myself he likes to trade SPX rut those types of things wouldn't it be really cool if there was some information about selling credit spreads when volatility is actually low well I've done some homework and that's exactly what I'm going to share with you guys tonight in this video and for those who don't know my name is Eric and you're watching liquid options this is a weekly show about trading options posted each Wednesday night if this is your first time visiting the channel be sure to subscribe so you don't miss any of the future episodes I put a lot of research out on here and trading index options at a low-volatility environment is coming right up [Music] all right so let's get started and talk about what constitutes a low-volatility environment we're gonna be looking at spwhy for 20-something years but we need to sort of define what low volatility means because when you when you you know developing a trading system or strategy you need some clear boundaries so that you're not you know taking impulse type trades and so you know I've got a charter the VIX I'm gonna be using the VIX it's kind of my filter as to whether or not we are in a low-volatility environment and you know you ask 10 traders you're gonna get 10 different answers but here's a chart of the VIX and I've I've put this line here at 18 and the initial study we're gonna look at we're gonna use 18 as our little volatility number so if if our trigger signal which we'll look at in a minute it happens and we're below 18 we're gonna look at you know possibly taking that signal but I just wanted to take a glance at all the trading levels for the VIX this is 10 years of the VIX and I have 18 here marked off so you can see the line and again a majority of the time we are trading below 18 and in this video we're kind of defining that as low volatility obviously we could lower this some more and say okay let's let's try 15 let's try 12 or whatever and I'm gonna show you how you can do that in the spreadsheet later we can adjust these levels but again we're gonna use 19 as a reference and I'm gonna scroll back in time and you can see that again a majority of the time the VIX is below the 19 level or I'm sorry 18 level but then you can see back in 2011 2010 you guys remember those that summer massive summer dip the VIX traded above 19 in this case we would not be trading the low volatility strategy because I keep saying 19 I got 18 because it's above the 18 level which is the data we're gonna look at and therefore we would want to do a different type of strategy you remember we're trying to find a strategy for low-volatility environments and it's not always going to be the case you can see here you know the the Oh 8 Oh 9 where the VIX was up in the 70s 80s almost had 90 so again we're not gonna be trading little volatility strategies here when VIX is up in the 50s and all this stuff so again we're looking for a low volatility trades and we're gonna be using the VIX because the last several years since we'll call it 2012 ish oh maybe the end of 2012 it's been pretty little volatility for the past five or six years with a few spikes here now you know past performance doesn't he you know you equate their future results I have no idea what the VIX is gonna do you know things are getting crazy in the market we could have another summer where we spike and or it could just kind of settle down and we could mosey on mosey on over but still again we're using 18 as our level to define a low-volatility environment okay so now that we've defined what low volatility means for now let's switch over to the SPX and let's talk about the charts that appear now a one or two videos ago check the previous episode I did a video about the pricing was the price channel trading strategy and talked about the price channel using the 200-day moving average as a sort of proxy for a bull market now because we're gonna be using the VIX we actually don't need the 200-day moving average anymore but that was just a different way to say hey I want to do a bullish strategy when I'm training above the 200 and well we're gonna be doing today basically saying hey if the VIX is below 18 let's look at doing some bullish little volatility stuff so a little bit different but you're gonna find that those kind of correlate together when the market sells off hard the VIX actually will spike even though we were above the 200-day moving average so it's me a little bit different so I'm going to first of all I'm gonna remove the 200-day moving average here and we're just left with the price Channel and we're using a 10 day price Channel that basically says this is the the bottom line is the 10-day low and the top line is the 10-day high and these are trading days these are not calendar days so when we talk about Buy which expiration we're gonna do we got to consider calendar days versus training days but we're gonna trading days and because we're really gonna be looking at selling a credit spread when we hit that 10-day low selling and out of the money credit spread that's about three percent lower so the other thing I'm gonna do here so I'm going to go into my price Channel in the upper band I'm actually gonna make the color black because we're not really using that as a signal when it gets kind of you know there we go that looks a lot better so that's you know once you guys get to know me a little bit one of the things I like the less on the chart the better so this is all we're looking at we're saying okay if the SPX hits a 10-day low and the VIX is below eighteen look at selling it out of the money put spread so let's take an example here just you know two days ago we had a little bit of a sell-off we gapped into the 10-day low so we made a new ten-day low this would have been a good day to sell and out of the money put credit spread and using this strategy now I just got back from vacation that's actually why there was no video net last week so I'm still kind of a really you know acclimating myself since I was gone last week I you know on vacation I was like man this is a nice little bull flag and we you know if this is a fake out or not but anyway but this would have been a pretty good indicator here so that's the trade when we hit the 10-day low and the VIX is below eighteen we're gonna sell a put credit spread about three percent out of the money now we're gonna jump into the spreadsheet that's got all the data and then we'll come back to this chart in a minute and we'll go through a couple examples in the analyse think back and we can kind of see what kind of credits and things that we can expect from from doing this so let's go ahead and hop over into the spreadsheet alright so I wanted to share with just how this data is collected cuz I've done some of these spreadsheets before and I always get a question well how do you do how did you do this and all this stuff I have a really good program or guide that puts this together for me so if you ever wanted a spreadsheet like this first of all I'm gonna make this one available this one's going to be for sale in a couple days so if you're interested in that make sure you like the video and I'm gonna put a link in the description it is a lot of data and there's a lot of time and you know there's some monies that go into creating these things but I wanted to show you kind of what we did here so first of all we looked at the s py going back to February 3rd 1993 I don't know why he chose that date but it's a lot of data and this goes here is the open high low and close of the s py and then the corresponding closed for the VIX on that particular day so and then basically this goes all the way down to when we got the spreadsheet which was basically the last month the end of last month 2018 so there's about 25 years of s py data and and VIX closes and then my magical friend does a bunch of formulas for me because I am NOT a coder I'm good with statistics but he I'm not that good and then what he does is he makes it super pretty for me to figure out I put in the dates that I want to consider I mean for this example I'm gonna do the whole thing and so here's the trigger point the trigger Bart is the the number of days of low the lowest low so this is the lowest low of 10 days right and 15 days later remember these are trading day so 10 days is to two weeks so a two week low and three weeks later when the VIX is below and then this I can actually adjust this if I want if I want to be above or between a certain levels I've got to just below 18 so that's what we're talking about and the three percent below the 10-day low so I did point 97 and basically what this tells me is the way I you can read this is when for the past 25 years or whatever it says 20 yeah about 25 years 25 years in a couple months maybe so for the past 25 years when the SBY hits a two-week low three weeks later three percent below that low when the VIX is below 18 the market is above that 3 percent level ninety-three percent of the time I know that's a big mouthful let's go through it again and then we'll we'll do it in the chart and it would make a lot more sense when the market hits a two-week low and we you know we would look to sell a credit spread that's 3 percent out of the money three weeks later that credit spread would still be out of the money ninety three percent of the time if the VIX was below eighteen when the ten when the ten day low got hit okay so let's let's go into the chart and let's let's look at that okay so I'm gonna look at the SPX now I know that the data we've done on s py but I found it is extremely accurate with the SPX as well I prefer to trade X px for a various host of reasons and we'll talk about that maybe another video but anyway let's let's just look at this so let's just take this example here on last month on the 24th the SPX had a new ten-day low because it hit this yellow line so what I want to do is say hey is was the VIX below 18 wheeler or the VIX and will come here on the what do we say the 24th the 24th the VIX closed that's really close the VIX closed at 1802 okay so technically we should not take that signal so let's look at another one let's look at this one here let's see this one on May 3rd of earlier this month so now we're gonna go into the think back tab and thinkorswim and I've got the date there it's it was May 3rd whoops this was May 3rd 2018 we're going to analyze and let's just look at kind of what kind of credit we could have gotten now again the spreadsheet is telling us three weeks later these are trading days so that's 15 trading day that's three weeks nine three percent of the time it's gonna be above in this case 25 50 is what we came up with so we can do a couple things we can do exactly three weeks which is about 21 days so we could go to well you know go to this particular weekly option and we could sell the 25 50 sell the vertical and we could get about 80 cents for a single strike now some of you may want to widen this out and you know we won't get into all that but that's a pretty decent credit the Delta is a 20 I like Delta 20 this would be good for me but if you're the kind of person who wants to sell something farther and then close it three weeks later we could double this and lets you for you know well we'll just shoot for the monthlies forty to forty two calendar days that is approximately six weeks so again would be selling about six weeks out with the idea we would try to collect half the credit or adjust I tend to like to sell the farther ones because I like the ability to adjust but again that's kind of beyond the scope of this okay but we're gonna sell the same strike here and we get a little bit better credit it's actually not that much better is it that's that's interesting but anyway so then if we look - sorry we are one two three four five six seven eight nine ten eleven twelve thirteen fourteen fifteen yes so about 15 trading days later so we come back to analyze and if we just kind of will do this we are at fifteen days would be ten seventeen and the 24th from May third you can see in both cases this would have been profitable obviously because the market rebounded from there but you know depending on you could have taken half profit sooner and been out of the trade or this one would actually expired worthless and and the 22 days so but that's the the general idea and I wanted to just kind of you know share that low volatility stuff now let's have a little fun with the spreadsheet now what we can do is say okay well what if we to establish a higher level vixx so one thing I want you to look at here when we do this is that waiting for the ten-day low with a VIX below 18 we had 305 trades over the last 25 years I don't know what that is yet how many per month or whatever but one thing we could do to increase our trades and what we want to do is see if the probabilities are about the same so we could do this we could raise the VIX with the idea that there you know even if we go up to like let's say 20 let's see what that does so by going up to VIX below 20 we increase the number of trades by about 30% and it's still a 90 percent you know out of the money situation so that's pretty good um the other thing we could do is instead of a 10 bar low what if we did something smaller like us like a 7 bar low well look at that so now we increase the number of trades even more but our percentage is starting to get below 90% not that that's a big deal it's just I'm just kind of you know just want you to see the relationships here that you can get more trades with a higher VIX level and a shorter number of days down you're gonna get more trades but you're gonna lose a little bit more not that much more but what if we kept it at 18 that's an interesting right so before we had this we had a 10 day 93% but we had 300 trades but if we went to a 7 day low then look for in 40 trades that's almost I mean that's well over 30% I mean even 40% more trades with about the same probability so you can increase your trading with the same sort of parameter still same thing three weeks later three percent out of the money they explode to 18 what if you're like uber conservative let's see if we said hey I only want to trade if the VIX is below fifteen let's see what that does that's isn't that interesting less trades less percent so the VIX could actually maybe be too low maybe that's a thing left to do some more research on that so anyway it's pretty cool thought it was good information something to consider the one I'm gonna leave you with I actually like the seven-day little my cell phone actually let's look at five day low five day low was interesting VIX below eighteen five day low not ten day 600 trades it doubled the trades about the same percentage you're gonna have to do that a little bit differently because you get like like you'll get multiple trades in a row so you're gonna you might actually be too many trades so this is too many trades for you you can simply pop this back up to ten days and you get about the same less trades that kind of thing so again these are some some things I've been looking at with using the VIX to establish sort of a low-volatility environment we can still look at doing credit spreads and just some different timeframes and and discussions about entry and again I like to keep my my charts very plain and simple because you know it's just it just makes life a lot easier so in a couple days if you're watching this video right when it came out and a couple days I'm gonna put a link if you want to purchase this spreadsheet to kind of mess around with yourself I will put a link for you can do that it's gonna be in a couple days so I post it in the store and if you're watching the video well after it then it's the links already down there so I hope you enjoyed this video if you have any questions let me know I love to hear your feedback in the comments and be sure to LIKE the video give me a thumbs up and again this has been liquid options posted every Wednesday night and we'll see you next week [Music]

Channel: Stock Market Options Trading

Views: 34,239

Rating: 4.8308573 out of 5

Keywords: low volatility option strategies, low volatility strategies, SPX Put Credit Spreads, SPX, VIX trading strategies, credit spread option trading, credit spread strategy, option strategies with examples, credit spreads weekly options, put credit spreads, credit spreads, trading SPX, vsa, low volatility, volatility, implied volatility, trading when volatility is low, pot odds

Id: utghvecsE8c

Length: 18min 39sec (1119 seconds)

Published: Wed May 30 2018