Volatility strategies: trading how much, not which way
Every option price contains a forecast of future movement. Volatility strategies take a position on that forecast itself. You are no longer asking whether the market goes up or down, but whether it moves more or less than the option chain currently implies.
What are volatility strategies? Volatility strategies are positions whose profit depends on the magnitude of the underlying's movement and on changes in implied volatility, rather than on direction. Long straddles and strangles are long volatility; short straddles and strangles are short volatility; calendars trade the difference in volatility between two expiries.
Short Straddle
NeutralShort Straddle sells a call and a put at the same strike, collecting both premiums to profit if the underlying barely moves: the combined credit is t…
Short Strangle
NeutralShort Strangle sells an out-of-the-money call and an out-of-the-money put, collecting both premiums to profit if the underlying stays between the str…
Long Straddle
VolatileLong Straddle buys an at-the-money call and an at-the-money put on the same strike and expiry, so it profits from a large move in either direction, a…
Long Strangle
VolatileLong Strangle buys an out-of-the-money call and an out-of-the-money put, so it costs less than a straddle but needs a larger move to break even and l…
Reverse Iron Condor
VolatileReverse Iron Condor is a four-leg long-volatility structure — an iron condor with every leg reversed — that pays a capped profit when the underlying …
Long Calendar Spread
NeutralLong Calendar Spread sells a near-dated option and buys a far-dated option at the same strike, profiting from the faster decay of the near leg while …
Double Calendar Spread
NeutralDouble Calendar Spread places two calendars at different strikes — one below spot, one above — widening the single calendar's tent into a profit plat…
Strap
VolatileA Strap buys two at-the-money calls and one at-the-money put of the same strike and expiry, for a net debit. Like a straddle it profits from a large …
Strip
VolatileA Strip buys one at-the-money call and two at-the-money puts of the same strike and expiry, for a net debit. Like a straddle it profits from a large …
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Frequently asked questions
What are volatility strategies?
Volatility strategies are positions whose profit depends on the magnitude of the underlying's movement and on changes in implied volatility, rather than on direction. Long straddles and strangles are long volatility; short straddles and strangles are short volatility; calendars trade the difference in volatility between two expiries.
How many volatility strategies are there?
StrategyGyan documents 9 volatility strategies in full, each with a payoff diagram, its Greeks, its maximum profit and loss stated as a formula and as a worked number, and both NIFTY and BANKNIFTY examples.
Which of these has defined risk?
Long Straddle, Long Strangle, Reverse Iron Condor, Long Calendar Spread, Double Calendar Spread, Strap, Strip carry a structurally capped maximum loss. Short Straddle, Short Strangle do not — their loss is bounded only by how far the underlying can move.