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As Volume Slumps in Summer, Focus on These Options Strategies

Published 06/07/2024, 04:11 PM
QQQ
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VIX
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Check out a chart of the Invesco QQQ Trust (NASDAQ:QQQ) below with volume overlayed on the bottom in blue. Eyeing a chart like this can give you an idea of when the highest volume days occur (generally when the market is pulling back), and also give you an idea of how volume is trending.

When volume is greater than average, you generally see more volatility and directional trading opportunities. When volume declines, the VIX typically declines, which can lead to less directional opportunity.

A screenshot of a computer screen  Description automatically generated

Take a look at the VIX daily chart below. As volume declined to the lows on the year in the QQQs, we also saw the VIX decline to the lows on the year at a value of 11.52.

A screenshot of a computer screen  Description automatically generated

When the VIX is below 17, this is considered a low-volatility environment. This environment is typically best suited for buying the dip, focusing on relative strength stocks, and using strategies like buying calls or selling put credit spreads.

When the market is in buy-the-dip mode, selling premiums like selling covered calls, selling put credit spreads, or selling iron condors (also known as iron flies) can be a way to take advantage of the summertime slump and sideways-to-upward action.

Of course, the low VIX means the premiums aren’t as juiced up as when the VIX is above 17. That means you will get a lower premium than you could have earlier in the year for selling the same spreads. But the benefit is that with less movement, you can be more likely to be right just because there is less market movement.

Another way I like to take advantage of this sluggish direction is by buying butterflies. In the butterfly, you are directionally long, but the center strikes are short, so in a way, you are taking advantage of selling premium as well. This strategy can help immensely when the market isn’t moving as much because if the long call isn’t exploding, you can still make money on the slow grind with the decay of the center strike on the fly.

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