I now realize this thread is really about "declining volatility" or "decreasing volatility" and option premiums are not the only thing that will rise unless its the only thing you understand. Yet, I don't know what you trade but at first glance...find something that's not correlated to what you trade as in a completely different asset. Declining volatility is ok in stocks, futures or forex but the problem is if volatility becomes low (below the norm) and then stays in that very low range for an extended time period...very little trade opportunities. This is when traders with discipline issue will keep trading when they do not have valid trade signals or they switch from their proven trade method to something like intuition trading under the facade to make something happen. Reality, in low volatility trading conditions, traders blow up via the dying of many little cuts versus high volatility trading conditions that causes blow ups in spectacular one day or a few trading days of losses. That's why I mentioned diversity in my prior post but not diversity as in switching to something that's correlated to the trading instrument that was in low volatility price action. Options never crossed my thought because this thread was not posted in the options section of the forum. P.S. I use volatility to trade futures...reason why volatility conditions is a very important aspect of my trading. Low volatility suck...time to go play some golf, read a book, paint the patio, swim in the pool with the kids...sex with the spouse. wrbtrader
The reason this came up is because I am looking for different strategies to trade in different market conditions, exploring everything. I think I'll discover the answers on my own with the data as I continue to analyze it, because the data is right there .. if volatility declines and there are instruments that increase in price because of that, then obviously that's where I'll focus my attention, and I like what others have said about options spreads to take advantage of that situation. I didn't post it in options because I'm not limiting the possibilities to options .. it's the basic strategy I'm looking for, and if options is the only way to take advantage of it, then it is what it is. There are a lot of ways to make money in the markets, and this is just another kind of circumstance I'm interested in understanding. Even when I don't trade a perspective, I like to understand what is going on, understand why other traders are trading it the way they are, because by understanding what's motivating them to take the specific positions they're taking I gain insight into understanding the market as a whole. But I will trade it if I can figure out a way to trade it that back tests well.
1) I would go to a lower TF and trade more often. Scalp. 2) If it is a persistent trend with low volatility (bull or bear) I would add to positions on the small PB’s and I would just keep adding, then exit on a reversal. The latter are some of the strongest type of trends albeit they can often happen with low volatility hence traders are fooled into trading against the trend thinking a reversal is “due” to happen. What I do is trade with the trend (albeit low volatility) and add to losing entries on pb’s building the position bigger and bigger until a reversal does take place. Then I exit. By adding on PB’s i am getting in at better prices.
I would disagree because of the dying of a thousand tiny cuts involving scalping. Yet, I'm curious what you would then do in high volatility trading conditions...the opposite via increasing your time frames ??? For your 2) suggestion...what do you trade and statistically...how much has your trading performance change when you add on positions to trades in low volatility trading conditions assuming you don't do the same in normal trading conditions ??? wrbtrader
My own studies on decreasing vola on stocks showed very modest gains and little potential. Also tried pairing with decreasing volu and just the latter. I wanted good risk adjusted returns, but ended up filtering PA too much. Looks good in hindsight for a few select stocks though hard to leverage and pick right stock at right time. So neat idea but was unusable for me.
You can short VXX or UVXY for Trading VIX. These 2 etfs face decay, which means that they lose value even when VIX flattens