If volatility is holding steady or nearing a peak though, it may be wise to consider selling options premium. As volatility creeps or rockets higher, implied volatility in options pricing moves higher too.

Volatility Trading Strategies

That inflates the prices of options and makes it more attractive for sellers looking to capture some premium. Sellers can also capture a higher premium for out-the-money sales, allowing them to have a bit more cushion on their trade.

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So what are some high volatility trade strategies? Investors can consider selling straddles or strangles, iron condors, bull put spreads, bear call spreads and cash-secured puts. Not that these strategies are guaranteed to be winners in high volatility environments, but they are certainly key considerations when it comes to an increasingly higher volatility environment.

It sure would be nice if there was a way to scan for elevated volatility plays in the options market. Fortunately, Option Party offers such a feature. Because Option Party uses its own measurements for implied volatility, traders are able to use a unique product offering unlike anything else and it allows for a ton of flexibility. A month that includes an earnings event unconfirmed :.

What is High IV in Options and How Does it Affect Returns?

Using March 19th as an expiry we first looks at bullish spreads, and compare directly to outright calls. With a stock as volatile as Gamestop, calls can be expensive. Because of that, many traders resort to buying far out of the money calls. That demand for upside calls increases volatility in those calls, making them expensive relative to at-the-money calls — a phenomenon known as skew.

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However, for those that are bullish, this may create an opportunity to utilize spreads rather than buying an outright call. It does so by selling those relatively expensive out-the-money Calls to help finance the purchase of a nearer to at-the-money Call. First, the call:. As you can see, not only is the call spread less expensive, the point at which is becomes profitable to the upside is much closer to where the stock is currently trading.

As indicated by the grey price of the breakeven. A note on probability of profit. The probability of profit displayed on these trades is based on the delta being assigned to the breakeven of the trade. High volatility also affects bearish options trades. One of the counter-intuitive aspects of a high volatility stock like Gamestop is that its implied volatility can go up as the stock goes higher and down as the stock goes lower. Implied volatility IV , on the other hand, is the level of volatility of the underlying that is implied by the current option price.

Volatility Trading | How To Trade With Volatility Strategies

Think of implied volatility as peering through a somewhat murky windshield, while historical volatility is like looking into the rearview mirror. While the levels of historical and implied volatility for a specific stock or asset can be and often are very different, it makes intuitive sense that historical volatility can be an important determinant of implied volatility, just as the road traversed can give one an idea of what lies ahead.

All else being equal, an elevated level of implied volatility will result in a higher option price, while a depressed level of implied volatility will result in a lower option price. For example, volatility typically spikes around the time a company reports earnings. Two points should be noted with regard to volatility:. The most fundamental principle of investing is buying low and selling high, and trading options is no different. Based on this discussion, here are five options strategies used by traders to trade volatility, ranked in order of increasing complexity.

This strategy is a simple but expensive one, so traders who want to reduce the cost of their long put position can either buy a further out-of-the-money put or can defray the cost of the long put position by adding a short put position at a lower price, a strategy known as a bear put spread. Note that writing or shorting a naked call is a risky strategy, because of the theoretically unlimited risk if the underlying stock or asset surges in price.

In order to mitigate this risk, traders will often combine the short call position with a long call position at a higher price in a strategy known as a bear call spread. In a straddle , the trader writes or sells a call and put at the same strike price in order to receive the premiums on both the short call and short put positions. The rationale for this strategy is that the trader expects IV to abate significantly by option expiry, allowing most if not all of the premium received on the short put and short call positions to be retained. Writing a short put imparts on the trader the obligation to buy the underlying at the strike price even if it plunges to zero while writing a short call has theoretically unlimited risk as noted earlier.

However, the trader has some margin of safety based on the level of the premium received.

A short strangle is similar to a short straddle, the difference being that the strike price on the short put and short call positions are not the same. As a general rule, the call strike is above the put strike, and both are out-of-the-money and approximately equidistant from the current price of the underlying. In return for receiving a lower level of premium, the risk of this strategy is mitigated to some extent.

Ratio writing simply means writing more options that are purchased. The simplest strategy uses a ratio, with two options, sold or written for every option purchased. The rationale is to capitalize on a substantial fall in implied volatility before option expiration. In an iron condor strategy, the trader combines a bear call spread with a bull put spread of the same expiration, hoping to capitalize on a retreat in volatility that will result in the stock trading in a narrow range during the life of the options.

The iron condor is constructed by selling an out-of-the-money OTM call and buying another call with a higher strike price while selling an in-the-money ITM put and buying another put with a lower strike price. Generally, the difference between the strike prices of the calls and puts is the same, and they are equidistant from the underlying. The iron condor has a relatively low payoff, but the tradeoff is that the potential loss is also very limited. For more, see: The Iron Condor. These five strategies are used by traders to capitalize on stocks or securities that exhibit high volatility.