Profiting From Low Volatility and Range Bound Stocks With Home On The Range Strategy

On Friday January 18 2013 the VIX Index closed at $12.40 marking a new 6 year low. This low volatility environment means smaller option premiums on many stocks. It is in this type of low volatility that I use the Home On The Range Strategy as it is superb at generating excellent profits from stocks and ETFs in a low volatility market.

As an investor there are some strategies I have fallen in love with. One of those strategies is my Home On The Range Strategy. Like all strategies it is not for everyone, but this strategy is simple to implement and trade, very profitable if done properly and shines in low volatility markets. It is excellent against range bound and stocks with low volatility like utility stocks. Many options investors stay away from range bound and low volatility stocks as they have smaller option premiums. This strategy excels against those types of stocks.

It is also wonderful for ETFs. This article looks at this strategy as it applies to stocks. A second article which I will finish shortly looks at applying it to ETFs.

Perfect Strategy For Low Volatility Environments

When low volatility enters the stock market, options lose value. It is only natural since in low volatility environments many stocks do not move around as much on a daily basis and therefore the market makers adjust the premiums on options to reflect the fact that the stock does not move around as much. The less volatile the stock is, the lower the premiums will be. This often happens even when the stock markets have high volatility but the stocks you want to trade against have low volatility.

This decline in options premiums is even more evident on out of the money options. The best volatility is with the options premiums that are at the money, but selling at the money increases the likelihood of assignment of the underlying shares. This too is natural because when a stock is slow-moving and you are selling options at the money or where the stock is trading, you have a very good chance that the stock will stay at or near the strikes you have sold.

Duke Energy Stock Example

An excellent example of the value of the Home On The Range Strategy is Duke Energy Stock. This stock is known for little volatility. As of Jan 18 2013, its 20 day historical volatility is at 11.9 % which is very low. Yet I can easily squeeze out of this stock a 15% return for the year. Sometimes I have been able to do even better but if my objective was to never own shares, then it is more difficult since the put premiums are best at the money.

Duke Energy Stock

Duke Energy Stock and the Home On The Range strategy

For example with the stock on Friday Jan 18 2013 closing at $66.81, the at the money puts of Feb expiration for the $65 strike are .40 cents which is not quite 1%. The out of the money puts at $62.50 are trading for just .10 cents. Since there is so little volatility to the stock, option premiums are poor. It’s only natural for it to be this way.

The Home On The Range strategy can boost that return by a wide margin, but only if I am willing to accept being assigned shares in the event that the stock falls back. If my goal was to never be assigned shares then I would not be able to trade this stock but need a stock with much higher volatility. Being assigned shares though doesn’t concern me with these types of stocks as I am almost always able to sell my shares or be exercise out through covered calls and repeat the strategy.

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