High VIX equals high option premium

When the VIX is high the option premium also tends to be much higher as well. It is important to grasp and adjust for this concept.

What does this mean? When you buy an option you pay the difference between the stock price and the strike price of the option you just bought. You also pay another fee made up of factors like time decay and volatility. All these factors are put together to form the price of an option.

When the VIX goes up it signals volatility is rising in the market. This means the premium of the options that you are paying for is also expensive. Which also means that if volatility goes down so will the price of the option even if the stock doesn’t move against you.

So, what can you do when volatility is high? There are a couple different answers to this question. The first and most obvious is selling options to collect the premium. If you sell options using the covered calls or a spreads you can take advantage of overinflated option prices by collecting the option premium.

Selling options, however, can only give you a limited return on your money. If you like buying options because of the unlimited reward potential associated with them, you may want to simply buy stocks. Stocks will not move as fast as the options will but they will give the same potential returns.

If you want bigger gains you can buy basic calls and puts during this time. Many traders don’t care too much about rising volatility. Just remember if you are buying options during highly volatile times you are taking a bigger risk then during regular times.

Every trader should make their own decisions on what to do in a situation like this one. Not all traders agree but that is how the market is set up after all.