Trading a VIX 30 environment is not the same as trading a VIX 15 environment when you’re an options trader. As the VIX rises, especially in a steady, upward trend, a variety of factors change in the stock market.
Stock Market Changes with a High VIX
Typically, in a high VIX environment where the VIX is above 17, and especially above 23, I see:
- Significantly increased intraday ranges in the indexes and high-momentum stocks
- A market sensitive to news-related developments
- A higher frequency of trend breaks
- Sell-offs that don’t seem to fit the fundamental narrative
- Liquidation breaks at key support zones
- Tickers making targets in significantly reduced time spans
VIX – Daily Chart
Check out the VIX on a Daily Chart below:
I’ll also note that a consistently trending higher VIX is certainly different from a sudden spike lower that quickly declines, as the downside momentum in the stock market typically picks up speed as the VIX continues its move.
Considering VIX Levels when Trading Options
Now, with this change comes changes to the trading strategy, as you simply can’t trade the market the same way you did before.
For example, in a VIX 15 market environment, you can typically have a full book of trades on, go out to lunch, or even take a vacation without much worry, as the market doesn’t tend to move too much. It generally sticks to its trend, making it relatively simple to buy the dip and use strategies like selling put credit spreads along with the trend or selling covered calls without much concern.
Now that the VIX trades between 17-23, this is generally a time of heightened volatility, where selling put credit spreads becomes a little more enticing: as the market moves more, those puts are juicier to sell. However, that is because the market is moving more. I’ll still generally trade debit spreads and butterflies in this environment, but time frames must be shortened to account for the additional market movement involved.
For example, if I generally sell put credit spreads 17-21 DTE in a VIX 15 environment, I may shift to selling them 9 DTE in a VIX 20 environment, and reduce the time on my butterflies from 21 DTE to 7-15 DTE.
However, when the VIX is 23-25, at that level, puts and calls are generally what I stick with, which is rarer for me, as I typically prefer spreads. But this is due to intense market movement. Setting up butterflies when your price target can be met with an overnight gap isn’t going to help you much. You can be right with the direction and target, and still not make money because the butterfly doesn’t have enough time to mature.
Calculating Overall Risk
All of that said, I also reduce my risk. Instead of having 10-12 positions on. I will stick with upwards of 5 instead, as puts alone are more expensive and are more volatile than butterflies. Always remember, risk first, then reward.
How is your trading changing in this volatile environment? Remember, volatility equals opportunity. It’s not something to be scared of, but it does require a bit of consideration when selecting option strategies.
