Volatility can be both exciting and unnerving; yet they also present an opportunity to make profits with volatility options trading strategies. The key lies in knowing which volatile options trading strategies work.
A long straddle is a strategy used to increase volatility without favoring one direction over the other of an asset’s price movement. To implement this tactic, a pair of call and put options with identical strike prices and expiration dates is purchased.
Straddle
A straddle is an options trading strategy with the potential to produce significant returns in volatile markets, though it requires precise timing and monitoring of risk. Furthermore, purchasing two at-the-money options with high premium costs may offset any potential gains.
A long straddle is an option-trading position that consists of two options, both call and put, which have the same expiration date and strike price. This trade can profit from any large moves in stock prices – it is ideal when major news events are anticipated but uncertainty exists as to which way their reaction may move prices.
Long straddles may be profitable when implied volatility increases and an underlying stock experiences a large movement before expiration, an effect known as positive vega.
Iron condor
The Iron Condor strategy involves opening four mutually offsetting positions with the expectation that their price won’t move significantly, by combining two spreads: one call credit spread above and one put credit spread below the market. Your goal should be to capitalize on premium received when selling both spreads while mitigating risks with long positions.
Success with Iron Condor trading relies on careful risk management. You should limit your position size so it does not represent an excessive portion of your trading capital and make sure there is sufficient liquidity when trading Iron Condors; otherwise slippage could eat into profits quickly. Furthermore, choosing an approach and direction which fit with both your personality and risk tolerance are key elements in finding success with trading Iron Condors.
Butterfly spread
Butterfly Spreads are more advanced options strategies that combine the benefits of two simpler plays – straddles and strangles – into one trade using four options contracts (four calls or four puts).
Long butterfly spreads tend to thrive in volatile markets and excel when the underlying stock trades near its middle strike price, while short butterfly spreads perform best when the underlying stock breaching through short strikes at either end of its wings.
Short butterfly spread strategies are relatively low cost to initiate and the risk is limited by any shifts in either direction in the market. Unfortunately, closing out an active position can be expensive and profit potential is limited – however they still present an excellent way to make money during volatile markets.
Synthetic put
Synthetic options provide traders with a convenient and flexible means to mimic the risk-reward profile of traditional put options without investing substantial capital. Their profit potential exceeds that of purchasing standalone puts alone, making synthetic options ideal for traders seeking to minimize risks while increasing rewards.
The synthetic put strategy combines short futures positions on a stock with long call options on that same stock, providing investors with a way to protect against unexpected price rises due to earnings reports, drug trial results or economic news.
Applying this strategy can reduce the number of transactions needed to adjust your position, thus cutting trading costs and capital requirements significantly. Furthermore, this strategy may help mitigate risk while safeguarding gains against market volatility.
Neutral options
There are various neutral options strategies designed to work in volatile markets. These trades usually feature defined risks with high chances of profit and can be applied in either bullish or bearish environments; additionally they are an excellent strategy when trading range-bound markets.
These neutral options trading strategies can be complex and may involve more than two legs in any one position. Their purpose is to take advantage of time decay, which may make them more profitable than traditional call/put spreads.
One of the more popular neutral options strategies is the short iron condor. Like its cousins straddle and strangle, this strategy makes money from time passing and a decrease in implied volatility, and by selling an at-the-money straddle and purchasing protective “wings.” Though somewhat less risky than its short straddle cousin, this option still presents risks.
