Volatility is one of the primary components of options trading, but it’s also one of the most complicated to understand.
A movement in the volatility can either be beneficial or disadvantageous for your portfolio. However, traders can maximize their high return chances by using a good trading strategy.
Conversely, trading volatility can also end up traders in huge losses if they lack appropriate knowledge about the market.
So, if you want to trade volatility more efficiently, continue reading this article to get comprehensive knowledge about top strategies for trading volatility with options.
Top 5 Strategies for Trading Volatility with Options:
There are several strategies to trade volatility more effectively and efficiently. Here are some of the major ones:
In a long strangle trading strategy, you buy an out-of-the-money call and an out-of-the-money put option with the same expiration date.
An out-of-the-money call option is a call option that gives you the right but not the obligation to buy an underlying asset at a fixed price called the strike price.
The strike price is always higher than the underlying asset’s current price. Additionally, the strike price of an OTM put option is lower than the current price of the underlying asset.
If the trader wants, the strike price can be altered, but the current price must be the same distance away from both the call and put strike prices.
Because both the put and call options are out of the money and have no intrinsic value, the long strangle strategy is less expensive and more effective.
A long straddle is a wonderful strategy to use if you are new to stock trading and want to mitigate your risks. It is one of the most straightforward trading strategies that have little risk and infinite profit potential.
A long straddle is a good option for turbulent markets when you predict considerable price movement but aren’t sure which way it will go.
It’s simple as it involves purchasing both a long call and a long put option. Then, you buy equal quantities of at-the-money (ATM) calls and put option contracts that expire on the same day.
Contracts with a strike price equal to the current price of the underlying securities are known as at-the-money contracts. You have the option of selecting a more
Additionally, you can get an additional benefit of price movement; you can choose a more extended expiry date.
When investors predict a big decrease in the price of the underlying stock, they enter into a strip straddle.
That is why in this type of straddle strategy, which is otherwise comparable to a long straddle, an investor buys more put options than call options.
The call options are purchased to protect against losses if prices rise instead of falling sharply as projected.
A strip strategy involves purchasing more put options and fewer call options, all with the same expiry date.
For investors who expect for strong movement in prices in the downward direction, this type of strangle strategy is best.
In this strategy, traders look to buy more Out of money (OTM) puts than OTM call options. There is no intrinsic value in the OTM option.
You can get profit when there is a strong price movement in either direction. However, you can get even high profits when the prices of an asset drop largely.
This is due to the fact that the strike price of a put option would be lower than the asset’s current price (since the option contract is OTM).
However, in order for that reduced strike price to make sense, you expect prices to go considerably lower. Therefore, you must pick how much money you want to be out of while using this strategy.
The premium will be cheaper the further away from the money you are. However, you may incur losses if you are too far out of money.
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When you believe there is going to be a significant price movement, but you don’t know which direction it will go, a long gut strategy can be a better option for you.
The risk is likewise minimal, but the reward potential is limitless. For example, you buy an equal quantity of ‘In The Money’ call options (strike price is lower than current stock prices), and ‘In The Money put options in a long gut (strike price is higher than the current rates).
You will earn in this case if an asset prices rise or fall drastically. When the cost of the underlying security rises or falls below the two breakeven marks that may be computed, you will earn.
The Bottom Line:
Above, we have discussed the top strategies for trading volatility with options, I hope you have understood the topic more precisely.
As traders use several trading strategies to trade volatility, these aforementioned strategies will be more effective and useful.
So, after understanding about these strategies, if you’re planning to start trading volatility, open a trading account with InvestBy today!