Volatile Options Strategies

What Are Volatile Options Strategies in Options Trading?

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Volatile Options Strategies - Introduction

So, you wish to profit no matter which way the market goes? Without having to predict market direction?

Volatile Options Strategies are the answer! Volatile Options Strategies have been popularized as options trading strategies that make money when a stock goes either direction.

The ability to profit in more than one direction has certainly given options trading a legendary edge over other financial instruments but that is only one way of understanding the term "volatile" in volatile options strategies. While volatile means trading volatile stocks that might make a sudden big up or down move, volatile also means volatility. Volatile options strategies are capable of trading and profiting from changes in volatility directly and display their real power when the direction of volatility goes in the favor of the options trader.

There are many volatile options strategies designed to take advantage of changes in volatility and sudden price breakouts and this tutorial will cover them and their underlying logic.

Volatile Options Strategies - Content

Duo-Direction Profit | Trading Volatility | List of Volatile Options Strategies

Volatile Options Strategies - Duo-directional Profits

Volatile options strategies are most popular in their ability to return a profit whether the underlying stock goes up or down as long as the move is significant enough to break the often wide breakeven points.

Yes, volatile options strategies allow you to profit from a volatile stock that is expected to make a big move in either direction soon. Such situations include uncertain earnings release or other such corporate news that will either make or break a company. For instance, volatile options strategies can be used on stocks that are about to release an important lawsuit verdict in a few days time which will result in the stock either soaring if the verdict is favorable or crashing if the verdict isn't favorable.

Volatile options strategies such as the Long Straddle has gained almost legendary status as investors discover for the first time a way of profiting without having to guess the eventual direction of a stock. Indeed, only through options trading using volatile options strategies can anyone produce such duo-direction profits due to the limited loss but unlimited gain characteristics of stock options. As mentioned above, the only problem with using volatile options strategies in anticipation of a breakout is in the fact that the breakeven points are usually much higher than single directional options trading strategies such as the Bull Call Spread.

In short, Volatile Options Strategies can be used as long as you are confident that a stock will make a big move soon.

How Volatile Options Strategies Produce Duo-Directional Profits?

Volatile options strategies produce dou-directional profits by exploiting the limited risk and unlimited gain potential of stock options trading. All volatile options strategies are made up of two parts; one part to profit more than it can lose when the stock goes up and the other part to profit more than it can lose when the stock goes down. The most basic of this is the Long Straddle options strategy.

The Long straddle consists of a call option that has unlimited profit potential when the stock goes up and limited risk potential when the stock goes down along with a put option that has has unlimited profit potential when the stock goes down and limited risk potential when the stock goes up. This way, if the stock goes up strongly, the call option makes more than enough to cover the limited loss on the put options and more, resulting in a profit. Conversely, if the stock goes down strongly, the put option makes more than enough to cover the limited loss of the call options and more, resulting in a profit.

More complex volatile options strategies are constructed simply by putting a bearish and a bullish options trading strategy with limited risk together and ensuring that each is capable of producing profits enough to cover the limited loss on the losing leg. For instance, a reverse iron butterfly spread is made up of a Bull Call Spread and a Bear Put Spread. Both spreads have limited risk and a limited profit that is sufficient to cover the potential loss of the opposite leg and more to result in a profit.

As such, Volatile options strategies typically are delta-neutral with a big gamma value when they are put on so that delta value increases in the direction of the eventual movement on the underlying stock, producing dou-directional profits.

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Volatile Options Strategies - Trading Volatility

The other money making opportunity with using volatile options strategies is to buy a potential increase in the implied volatility of the underlying stock. Implied volatility can rise due to many factors and the most common of which is the few days leading to earnings release. Options traders can profit from an expected increase in volatility simply by putting on volatile options strategies ahead of the period of increasing volatility and then closing the position when volatility peaks. Options traders often take the cue from the VIX, which is an index representing volatility in the market. Trading volatility is an unique opportunity which only options trading can exploit because options is the only financial instrument so far whose value is directly affected by volatility.

How Volatile Options Strategies Profit From Volatility?

All volatile options strategies are capable of increasing in value as the implied volatility of the underlying stock increases even if the price of the stock itself remained stagnant because all volatile options strategies have positive vega value. When an options trading position has positive vega value, the position increases in value when implied volatility increases and decreases in value when implied volatility decreases. Options spreads with this kind of characteristic are known as Backspreads.

Volatile options strategies ensures a positive vega value through two main position construction methods:

1, long options only.

2, long nearer the money options and short further from the money options.

In the first method, all long options, calls and puts, have positive Vega value. Volatile options strategies constructed using only long call and put options will naturally have a positive position vega. An example of a volatile options trading strategy with long options only is the Long Straddle. In the second method, at the money options have a higher vega value than in the money options and out of the money options. Volatile options strategies ensures a positive net position vega by buying at or near the money options and shorting in the money and out of the money options. An example of this is the Short Butterfly Spread.

List of Volatile Options Strategies

Here is a list of Volatile Options Strategies classified according to their relative complexity in options trading. Complex Volatile Strategies will have more legs in a single position while basic Volatile Strategies consist of only two legs.

Basic Volatile Strategies :: Long Straddle :: Strip Straddle :: Strap Straddle :: Long Strangle :: Strip Strangle :: Strap strangle :: Long Gut

Complex Volatile Strategies :: Short Butterfly Spread :: Short Condor Spread :: Short Albatross Spread :: Reverse Iron Butterfly Spread :: Reverse Iron Condor Spread :: ITM Iron Condor Spread :: Reverse Iron Albatross Spread :: Call Ratio Backspread :: Call Diagonal Ratio Backspread :: Put Ratio Backspread :: Put Diagonal Ratio Backspread :: Short Call Horizontal Calendar Spread :: Short Call Diagonal Calendar Spread :: Short Put Horizontal Calendar Spread :: Short Put Diagonal Calendar Spread :: Short Calendar Straddle :: Short Calendar Strangle :: Short Put Ladder Spread :: Short Call Ladder Spread

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