Options aren't just about where price is going—they're also about how much it’s expected to move. That’s where volatility-based trading comes in. In this guide, you'll learn how to structure trades based on implied volatility (IV) rather than direction alone.
Understanding Implied Volatility (IV)
High IV=Options are expensive (greater expected movement)
Implied volatility rises before big events (e.g., earnings) and falls afterward—a pattern that can be both a risk and an opportunity.
1. Long Straddle – Betting on Movement, Not Direction
Buy both a call and a put at the same strike/expiration.
Example: Stock is $100.
Buy $100 put for $2.20
Breakeven Zones:
Downside=$95.30
Earnings are approaching
Major economic releases (CPI, Fed decisions)
Buy OTM call and OTM put (less premium, wider breakevens).
Example: Stock is $100.
Buy $95 put for $1.20
Breakevens: $107.50 and $92.50
3. Short Straddle or Strangle – Profit from Boredom
You’re selling volatility. Premiums are inflated. You want nothing to happen.
Example: Stock at $50
Sell $50 put for $2.10
Profit range: Between $45.90 and $54.10.
4. Calendar Spreads – Playing the Time Curve
You sell a near-term option and buy a longer-term one at the same strike.
Example: Stock is $75
Buy 4-week $75 call for $2.50
You want the stock to hover near $75, so the short option decays and the long one retains value.
Front-month IV is inflated
5. Diagonal Spreads – Add Direction to a Calendar
Example:
Buy 4-week $75 call
Profits from:
Delta exposure to upside
6. Vega and Volatility Sensitivity
Positive Vega: Long options gain from rising IV
Monitor:
IV Percentile: % of time IV was below current level
After high-impact events (e.g., earnings), IV often collapses. This drop in expected movement causes long options to lose value—even if directionally correct.
Buy a straddle before earnings
Stock moves only 1%
IV drops from 60% to 30% overnight → Option value evaporates
Selling premium into events (if experienced)
Wrapping Up: Trade the Odds, Not Just the Price
Profit without guessing direction
Trade the market’s expectations, not just its outcomes
Range-bound
Irrationally pricing fear or calm
Make sure you didn't miss: OptionsGreeks before our upcoming 'Greeks in Practice' — applying the math behind your trades to real-world setups.
This article was written by Itai Levitan at www.forexlive.com. Read More Details
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