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Free Option Courses: Volatility Strategies
There are numerous strategies available for taking advantage of increases or decreases in volatility. These strategies are called non-directional strategies or volatility strategies. They are delta neutral strategies.

Volatility is subject to the forces of supply and demand. Implied volatility will tend to rise during periods when demand from options buyers is strongest and will fall when demand is weakest. The key for all options trader is to buy volatility when it is perceived to be low and to sell volatility when it is perceived to be high.

List of delta neutral strategies used by professional options traders:
Note:

Note: buy 1*put (100), means buy one put with a strike of 100.

Straddle: volatility trading strategy

 

Long straddle

Short straddle
Anticipations and characteristics Market direction neutral (delta=0) and implied volatility up (vega>0).

Limited loss - Unlimited profit - Important cost - Needs a large market move in either direction (gamma>0).

 Market direction neutral (delta=0) and implied volatility down (vega<0).

Unlimited loss - Limited profit - Cash credit - Needs market direction stability (gamma < 0).
Strategy Buy call and put with same strike price. Sell call and put with same strike price.

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Strangle: volatility trading strategy

 

Long strangle

Short strangle
Anticipations and characteristics Market direction neutral (delta=0) and implied volatility up (vega>0)

Limited loss - Unlimited profit - Important cost - Needs a large market move in either direction (gamma>0).

 Market direction neutral (delta=0) and implied volatility down (vega<0)

Unlimited loss - Limited profit - Cash credit - Needs market direction stability (gamma < 0).
2 ways of creating a Strangle: Long strangle: Buy call and Buy put with lower strike. Example : buy 1*put(100) / buy 1*call(105)

Long gut strangle: Buy call and Buy put with a higher strike.Example :buy 1*call(100) / buy 1*put(105)

 Short strangle: Sell call and Sell put with lower strike. Example : sell 1*put(100) / sell 1*call(105)

Short gut strangle: Sell call and Sell put with a higher strike. Example :sell 1*call(100) / sell 1*put(105)

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Call ratio & back spread: volatility trading strategy

 

Call back spread

Call ratio spread
Anticipations and characteristics Market direction neutral (delta=0) and implied volatility up (vega>0).

Limited loss - Unlimited profit if market direction up - Cash credit - Needs a large market move in either direction (gamma>0).

 Market direction neutral (delta=0) and implied volatility down (vega<0).

Unlimited loss if market direction up - Limited profit - Low cost - Needs market direction stability (gamma<0).
Strategy Sell call and buy more call with higher strike price.

Example: sell 1*call (100) / buy 2*call (105).

 Buy call and sell more call with higher strike.

Example: buy 1*call (100) / sell 2*call (105).

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Put ratio & back spread: volatility trading strategy

 

Put back spread

Put ratio spread
Anticipations and characteristics Market direction neutral (delta=0) and implied volatility up (vega>0)

Limited loss - Profit illimité à la Market direction down - Cash credit - Needs a large market move in either direction (gamma>0)

 Market direction neutral (delta=0) and implied volatility down (vega<0)

Unlimited loss if market direction down - Limited profit - Low cost - Needs market direction stability (gamma<0)
Strategy Sell put and Buy more put with a lower strike price.

Example: sell 1*put (105) / buy 2*put (100)

 Buy put and sell more put with a lower strike price.

Example: buy 1*put (105) / sell 2*put (100)

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Butterfly: volatility trading strategy

 

Short butterfly

Long butterfly
Anticipations and characteristics Market direction neutral (delta=0) and implied volatility up (vega>0)

Limited loss - Limited profit - Low cost - Needs a large market move in either direction (gamma>0).

 Market direction neutral (delta=0) and implied volatility down (vega<0)

Limited loss - Limited profit - Low cost - Needs market direction stability (gamma<0).
4 ways of creating a butterfly Short call butterfly. Example: sell 1*call (100) / buy 2*call (105) / sell 1*call (110).

Short gut iron butterfly. Example: sell 1*call (100) / buy 1*call (105) / buy 1*put (105) / sell 1*put (110).

Short iron butterfly. Example: sell 1*put (100) / buy 1*put (105) / buy 1*call (105) / sell 1*call (110)

Short put butterfly. Example: sell 1*put (100) / buy 2*put (105) / sell 1*put (110)

 Long call butterfly. Example: buy 1*call (100) / sell 2*call (105) / buy 1*call (110).

Long gut iron butterfly . Example: buy 1*call (100) / sell 1*call (105) / sell 1*put (105) / buy 1*put (110).

Long iron butterfly. Example: buy 1*put (100) / sell 1*put (105) / sell 1*call (105) / buy 1*call (110)

Long put butterfly. Example: buy 1*put (100) / sell 2*put (105) / buy 1*put (110).

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Condor: volatility trading strategy

 

Short condor

Long condor
Anticipations and characteristics Market direction neutral (delta=0) and implied volatility up (vega>0)

Limited loss - Limited profit - Low cost - Needs a large market move in either direction (gamma>0).

 Market direction neutral (delta=0) and implied volatility down (vega<0)

Limited loss - Limited profit - Low cost - Needs market direction stability (gamma<0).
4 ways of creating a condor Short call condor. Example : sell 1*call (100) / buy 1*call (105) / buy 1*call (110) / sell 1*call (115)

Short gut iron condor. Example: sell 1*call (100) / buy 1*call (105) / buy 1*put (110) / sell 1*put (115)

Short iron condor. Example : sell 1*put (100) / buy 1*put (105) / buy 1*call (110) / sell 1*call (115)

Short put condor. Example : sell 1*put (100) / buy 1*put (105) / buy 1*put (110) / sell 1*put (115)

 Long call condor. Example : buy 1*call (100) / sell 1*call (105) / sell 1*call (110) / buy 1*call (115)

Long gut iron condor. Example: buy 1*call (100) / sell 1*call (105) / sell 1*put (110) / buy 1*put (115)

Long iron condor. Example : buy 1*put (100) / sell 1*put (105) / sell 1*call (110) / buy 1*call (115)

Long condor put. Example : buy 1*put (100) / sell 1*put (105) / sell 1*put (110) / buy 1*put (115)

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Albatross: volatility trading strategy

 

Short albatross

Long albatross
Anticipations and characteristics Market direction neutral (delta=0) and implied volatility up (vega>0)

Limited loss - Limited profit - Low cost - Needs a large market move in either direction (gamma>0).

 Market direction neutral (delta=0) and implied volatility down (vega<0)

Limited loss - Limited profit - Low cost - Needs market direction stability (gamma<0).
4 ways of creating an albatross Short call albatross. Example : sell 1*call (100) / buy 1*call (105) / buy 1*call (115) / sell 1*call (120).

Short gut iron albatross. Example: sell 1*call (100) / buy 1*call (105) / buy 1*put (115) / sell 1*put (120).

Short iron albatross. Example: sell 1*put (100) / buy 1*put (105) / buy 1*call (115) / sell 1*call (120).

Short put albatross. Example: sell 1*put (100) / buy 1*put (105) / buy 1*put (115) / sell 1*put (120).

 Long call albatross. Example : buy 1*call (100) / sell 1*call (105) / sell 1*call (115) / buy 1*call (120).

Long gut iron albatross. Example: buy 1*call (100) / sell 1*call (105) / sell 1*put (115) / buy 1*put (120).

Long iron albatross. Example: buy 1*put (100) / sell 1*put (105) / sell 1*call (115) / buy 1*call (120).

Long albatross put. Example: buy 1*put (100) / sell 1*put (105) / sell 1*put (115) / buy 1*put (120).

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Call christmas tree: volatility trading strategy

 

Short call christmas tree

Long call christmas tree
Anticipations and characteristics Market direction neutral (delta=0) and implied volatility up (vega>0)

Limited loss - Unlimited profit if market direction up - Needs a large market move in either direction (gamma>0).

 Market direction neutral (delta=0) and implied volatility down (vega<0).

Unlimited loss if market direction up - Limited profit - Low cost - Needs market direction stability (gamma<0).
Strategy Strategy: Sell a call with a relatively low strike, X; buy a call with a relatively higher strike, Y ; and buy a call with a strike price between X and Y Strategy: Buy a call with a relatively low strike, X; sell a call with a relatively higher strike, Y ; and sell a call with a strike price between X and Y
Example Example: sell 1*call (100) / buy 1*call (105) / buy 1*call (110). Example: buy 1*call (100) / sell 1*call (105) / sell 1*call (110).

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Put christmas tree: volatility trading strategy

 

Short put christmas tree

Long put christmas tree
Anticipations and characteristics Market direction neutral (delta=0) and implied volatility up (vega>0).

Limited loss - Unlimited downside reward - Important cost - Needs a large market move in either direction (gamma>0).

 Market direction neutral (delta=0) and implied volatility down (vega<0).

Unlimited loss if market direction down - Limited profit - Low cost - Needs market direction stability (gamma<0).
Strategy Strategy: Sell a put with a relatively high strike, X; buy a put with a relatively lower strike, Y ; and buy a put with a strike price between X and Y Strategy: Buy a put with a relatively high strike, X; sell a put with a relatively lower strike, Y ; and sell a put with a strike price between X and Y
Example Example : buy 1*put (100) / buy 1*put (105) / sell 1*put (110) Example : sell 1*put (100) / sell 1*put (105) / buy 1*put (110)

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