When implied volatility decreases, this also reduces the amount of premium in an option. Many times, this is a great opportunity to purchase a calendar or time spread.
Let’s look at CBOE:
The above chart shows me that we could be nearing some resistance at the red line (50 day moving average) of $105.88, but… if the stock can break through there could be some room to run to the upside.
This chart shows both the stock volatility (blue) and option implied volatility (red). Since the implied volatility is down near its low point, trading around 19%, this is a signal to buy “cheap” premium. But since we really don’t have a direction in mind, a strategy is to buy a strangle (call and a put) to benefit from a move in EITHER direction. (We are targeting the 102 put and 107 call).
We typically like to look about 30 days in the future so we are targeting the July 13th weekly expiration options. In order to offset the debit or expense of buying these options, we will sell the same strikes (102 put and 107 call) but in a closer term expiration. Basically, we are financing our purchase with the sale of nearer dated options.
This calendar or time spread is a fantastic strategy in a low volatility environment. The goal is to profit from both time and volatility. An increase in implied volatility, all other things being equal, will have a positive result on this strategy because the longer dated options are more sensitive to changes in volatility (vega). The passage of time also has a positive impact on this strategy until we get near the short term options expiration.