The financial talking heads are complaining that market volatility is on the rise, as if that’s a bad thing; historically overall market volatility is currently very low, with the VIX at a bit over 16. And that’s with a recent bump due to the Fed meeting, as much of this year the VIX has been super low around 12 or lower. This is largely due to the actions taken by the Fed.

Traders like a slightly higher volatility, around 18 to 20 is ideal. When volatility is a little higher, trading strategies work better and options have more premium, which means there’s more meat on the bone. Long term low volatility is unhealthy for a market, it’s like having a weak heart beat. Low volatility means trading ranges are squeezed leaving little room to profit.

VXAPL vs VIX

VXAPL vs VIX

Apple volatility over the past few weeks has quietly withered away, well below its average of 32, even in the face of recent selling pressure. This presents an opportunity for options traders for two reasons; periods of low volatility are almost always followed by spikes in volatility, and 2) option premiums are very low, meaning options are cheap.

Long Straddle and Strangle

Long Straddle and Strangle (click to enlarge)

So, with Apple about to enter a period of higher volatility, now would be a good time to buy a neutral or directionless strategy that would take advantage of a large move in either direction. A long straddle or strangle would fit the bill nicely.

Tagged with →