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Is Checking In On Volatility A Part Of Your Daily Trading Routine?

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by Charlie Bassett in Blog
June 8, 2021 0 comments

Over the past twenty five years of trading mistakes and successes that I have experienced, one habit that I have learned about and implemented into my daily routine that has helped me become consistently profitable is habitually checking in on the VIX, or Volatility Index, on a daily basis.

Gavin posted a great article that explains volatility more in detail here, and if you are an options trader (whether that be buying or selling), then volatility is something that you should keep closely on your radar.

I’m specifically referring to Implied Volatility (IV), and how it impacts the pricing of options.

When things start to look gloomy in the stock market, selling and fear set in which makes the VIX rise, as well as the Implied Volatility on most options that are being traded at that time.

This means that when uncertainty is higher, you are going to pay a price to buy that option that you want.

There are many real world examples happening right now of how uncertainty in different types of markets are affecting prices.

Beef, lumber, and real estate prices in the US are all great examples of how people are willing to pay a “premium” for the goods that they want, and when things start to settle down or when supply catches back up, prices will stabilize and the premiums will be eliminated or lowered.

Option pricing works in a similar way, but options don’t need a pandemic to increase the Implied Volatility.

Events such as earnings, news, rumors, product approvals, and just general market conditions can all increase Implied Volatility in options.

As an option seller, it is more advantageous to sell options when Implied Volatility is high, and as an option buyer it is more advantageous to buy options when Implied Volatility is low.

If you approach trading as a business, then you need to make sure you secure the right pricing whether that be buying or selling.

I typically will check in on the VIX anywhere from three to five times per day, with the minimum being in the morning, at lunch time, and in the evening.

Outside of market hours, there are VIX futures that trade as well for overnight access.

I have many habits and routines as a daily trader (some more complex than others), but checking the VIX is definitely the one that sits at the top.

This is an indicator that should become second nature for you to keep an eye on, because watching the VIX regularly will help you keep a 30,000 foot view of the markets.

While there are a number of factors that you need to look at before any option entry, implementing volatility awareness as one of those factors that you look at may pay off in the long run.

About the Author: Charlie Bassett is the founder of Bassett’s Assets, an investment company that specializes in the selling of equity option premium.  He is also an instructor for OptionsTradingIQ.com. To book in a coaching session with Charlie, email [email protected]

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

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Options Trading 101 - The Ultimate Beginners Guide To Options

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