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What To Do When There Is Low VIX and Low Volatility

Since the last one month INDIA VIX is hovering around 10-12 range. This is historically at a very low range. Average range of INDIA VIX is 14-16, above 17 is considered high. Above 22 is very high. Above 30 it is better not to trade.

Right now at 9.35 am, 11-May-2017, INDIA VIX is 10.7050.

On top of that NSE is showing little movement since last one month. See this image below, Nifty has moved very low from 10-April-2017 to 11-May-2017:

This is just 1% move.

When there is no panic in the markets

VIX gets low.
Volatility is low.

Please note that volatility is the speed of movement. VIX is Volatility Index, which shows the market’s expectation of 30-day volatility. When the market is not expected to move much VIX will obviously fall.

Problems with lower VIX and if markets are stable not moving at all

1. Stocks give returns lower than or equal to Fixed Deposits.
2. Option premiums are low not encouraging Option Sellers to Sell as they get less for more risk.
3. Option buyers are at more risk as the lower premiums lure them to buy more options at the same cost. But when markets are not moving at all, the premiums gets evaporated and buyers in hope of a move keep the trade on hold. End results – option expires worthless and all their money goes down the drain. It becomes ZERO.
4. Trading becomes boring. See this, a major investment firm in USA tweeted this:

Same happening in India too as seen in the image above.

Does low VIX a sign of a Storm?

Most of the times it does happen. In stock markets whatever goes down has to come up and whatever goes up has to come down. So if not today, may be tomorrow or later VIX has to rise, and since stocks markets are inversely proportional to VIX, if it rises stock markets will fall.

Rich investors will hedge their portfolio against a fall.

Some mutual fund managers also hedge their funds.

Retail derivative traders who know hedge also hedge, but as most do not know are option buyers. In times like these money of option buyers goes to rich stock investors who hedge their investments, hedge fund managers and smart derivative traders who know hedging methods.

To end, I can only say is if you are an option trader and do not know how to hedge you are doing a big mistake.

Whether it is high volatility or low volatility, high VIX or low VIX, hedging is something that almost always helps you in trading properly and increasing your winning ratio.

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About the author: I started trading stock markets since 2007. However my first 3 years were losses. Then I dedicated almost 1 year on studying, researching, paper trading options and learned a lot in that time. Since 2011 I am trading Nifty options profitably. Call me if you need any help trading options on 9051143004.

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