trading volatility
- Thread starter met1989
- Start date
As @Robert Morse points out, the long straddle can be used to express a view on an increase in volatility. But you should consider that whatever event you think should result in it has most likely been already priced in (which is why those long straddles are so expensive.) In other words, your view should be significantly "more right" than that of the market: you'll need to make back the premium that you pay out plus hopefully a good bit of profit. Otherwise, it's a poor bet.
Basically what you want is to ensure positive payoff regardless of the direction of the stock price movement. Best way to do that is to contract position from put and call option what is called straddle. The losses from this position are limited to the cost for purchasing options and profit does depend on volatility.
Robert Morse
Sponsor
You can sell a calendar. Straddle was the obvious response.
Does the intensity of the move favor one over the other? For example, a trending move would favor a straddle, but a volatile move (like gap) would favor a calendar (assuming price moves same distance)?
Robert Morse
Sponsor
The cal sell has limited profits while the straddle does not.
I was thinking of debit calendar spread - sell front month and buy back month. If I did this with both calls and puts at same strike, what would this creature be called - iron calendar fly? If it doesn't have a name, I am going to call it iron bat!
Robert Morse
Sponsor
Buying a calendar will target a stock that stays within a range while selling the calendar will target a stock that moves away from that range, which was the question.