what type for strategy is best to use to profit on volatility?

Discussion in 'Options' started by jgold310, May 27, 2008.

  1. jgold310


    Hello everyone,

    what's the best strategy to use in order to profit on high volatility and limited risk?
  2. thelost


    i am no options expert but i believe buying simple calls and puts is a way to profit from increasing volatility.

    this is because the price of a call or put generally increases/decreases as volatility increases/decreases.

    there's probably more advanced strategies that will hedge out time decay too.
  3. jgold310


    Thanks for the reply. But the volatility is already very very high, 52wk high.

    I just want to profit on the volatility and not necessarily in the move of the stock.

    I was looking for a short straddle but that has too much risk and I doubt the stock will stay in a range.
  4. thelost


    i believe a "double calendar spread" profits from increasing volatility and is a bet that the price stays the same.

    it's pretty complicated though. has 4 legs and i'm not familiar with it.

    you could probably find info on google.

    if you think volatility is too high and will decrease you would want to sell calls/puts but this of course has unlimited risk.

    the websites i have been visiting recently seem to believe volatility will rise further but who knows.
  5. If the volatility level is already at a 52wk high you are looking for volatility to likely drop. This means that options tend to be overpriced. So you want to look at selling options. This way as volatility comes back down and the option prices drop you can buy to cover at a lower price. If the volatility moves enough you might can handle the stock moving against you slightly.

    Now it is important to note that this mainly affects single option and option + stock strategies such as protective puts and writing covered calls. The reason is that with any type of spread you are both long and short some positions and the changes in volatility will basically affect both the long and short positions equally.

    You should really learn about your greeks and if you are interested in trying to scalp volatility then pay special attention to Vega. While volatility scalping really only applies to single option strategies the over all Vega value of a position can help it become more profitable faster but usually does not affect over all profitability at expiration.
  6. There are two similar trades the Double Diagonal and the Double Calendar Spread. The Double Diagonal is basically an Iron Condor with the short positions in the front month and the long positions in the back month. The Double Calendar Spread is writing a call and put in the front month and buying a call and put in the back month with ALL FOUR positions being at the same strike price. They beauty of these positions is that if you are right and the price stays in the same range you can close just the short positions right before expiration and re-write them in the back month for even more profit that is still protected by the long positions. These are advanced trades though and I do not recommend them for anyone that does not fully understand options and everything that can affect them.
  7. buybig


    sell the call?

    straddle w/ a directional bias?

  8. I am not quite sure what you mean by "straddle w/ a directional bias". You either buy a straddle (buy a call and buy a put) which make money on a large move either direction, or you sell a straddle and keep the premium if the stock doesn't move at all. Selling a straddle is more profitable if IV is high (overpriced) and moving downward but ONLY if the stock stays in the profit range. It is more important in these trades to worry about the price action of the underlying and Theta (time decay) than it is to worry about Vega (volatility) but IV does help. The reason for this is you usually sell straddles on relatively short time frames (2-4 weeks) and since you are expecting the contracts to expire worthless the money you keep will not change no matter what happens to volatility. The volatility changes will only apply if you need to close the position early. As long as the time decay out paced the changes in volatility + the changes in delta you make money.
  9. Underlying is at 100, you sell 1x 100 call and 2x 100 put. Your short straddle has a directional bias towards the upside.
  10. jgold310


    Thanks for all the advice.

    The stock I'm talking about is MYGN.

    They will release the results of a new drug on Alzheimer's in about a month.
    The stock will move a lot when the results come out, I guess that's why the volatility is high.
    #10     May 27, 2008