Equity Derivatives and Structured Products Glossary: Volatility trading


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Volatility trading

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Volatility trading

Volatility trading

A strategy based on a view that Future Volatility in the Underlying Will be more or less than the Implied volatility in the Option price. Option market-makers are Volatility traders. The most common way to buy/sell Volatility is to buy/sell options, Hedging the directional Risk with the Underlying. Volatility buyers make money if the Underlying is more volatile than the Implied volatility predicted. Sellers of Volatility benefit if the opposite holds. Other methods of buying/selling Volatility are to buy/sell combinations of options, the most usual being to buy/sell straddles or strangles. Other strategies take advantage of the difference between implied volatilities of differing maturity options, not between implied and actual Volatility. For example, if Implied volatility in Short-term options is High and in longer options Low, a trader can sell Short-term options and buy longer ones.

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