Volatile Options Trading Strategies
Options trading have two advantages over almost every other form of trading. One is the ability to generate profits when we predict a financial instrument will be relatively stable in price, and the second is the ability to make money when we believe that a financial instrument is volatile.
When a stock or another security is volatile it means that a large price swing is likely, but it's difficult to predict in which direction. By using volatile options trading strategies, it's possible to make trades where we will profit providing an underlying security moves significantly in price, regardless of which direction it moves in.
There are many scenarios that can lead to a financial instrument being volatile. For example, a company may be about to release its financial reports or announce some other big news, either of which probably lead to its stock being volatile. Rumors of an impending takeover could have the same effect. There are usually plenty of opportunities to make profits through using volatile options trading strategies.
What are Volatile Options Trading Strategies?
Volatile options trading strategies are designed specifically to make profits from stocks or other securities that are likely to experience a dramatic price movement, without having to predict in which direction that price movement will be. Given that making a judgment about which direction the price of a volatile security will move in is very difficult, it's clear why such they can be useful.
There are also known as dual directional strategies, because they can make profits from price movements in either direction. The basic principle of using them is that we combine multiple positions that have unlimited potential profits but limited losses so that we will make a profit providing the underlying security moves far in enough in one direction or the other.
Buying call options- long call has limited losses, the amount we spend on them, but unlimited potential gains as we can make as much as price of the underlying security goes up by. Buying put options- long put also has limited losses and almost unlimited gains. The potential gains are limited only by the amount which the price of the underlying security can fall by (i.e. its full value).
By combining these two positions together into one overall position, we should make a return whichever direction the underlying security moves in. The idea is that if the underlying security goes up, we make more profit from the long call than we lose from the long put. If the underlying security goes down, then we make more profit from the long put than we lose from the long call.
This isn't without its risks. If the price of the underlying security goes up, but not by enough to make the long call profits greater than the long put losses, then we will lose money. Equally, if the price of the underlying security goes down, but not by enough so the long put profits are greater than the long call losses, then we will also lose money.
Basically, small price moves aren't enough to make profits from this, or any other, volatile strategy. To reiterate, strategies of this type should only be used when we are expecting an underlying security to move significantly in price.