Volatility strategies: the concepts, and the risks they carry
Every position on this page is a way of expressing a view on how much a market will move rather than which way. These pages explain the mechanics and, more importantly, where each one breaks. Several carry losses with no structural limit. None of them is a recommendation, and none of them earns anything reliably.
What is volatility strategies? Volatility strategies are positions whose profit and loss depend primarily on the magnitude of an underlying's movement, or on changes in implied volatility, rather than on direction. Long volatility positions pay a known premium for an unbounded payoff; short volatility positions collect a known premium and accept an unbounded loss.
Long Volatility
Long volatility is any position built to gain when volatility increases — typically by owning options — so that its maximum loss is the known premium paid…
Short Volatility
Short volatility is any position built to gain when volatility falls — typically by selling options and collecting premium — so that its maximum profit is…
Long Vega
Long vega is a position whose value rises when the LEVEL of implied volatility rises, independent of whether the underlying actually moves — an exposure t…
Short Vega
Short vega is a position whose value falls when implied volatility rises, giving it a steeply asymmetric exposure in which the entire upside lives in a na…
Gamma Scalping
Gamma scalping is the practice of holding a delta-hedged long-gamma position and re-hedging it back to flat as the underlying moves, which converts the di…
Delta Hedging
Delta hedging is the practice of holding a position in the underlying that offsets the directional exposure of an option, so that small moves in the spot …
Volatility Arbitrage
Volatility arbitrage is buying an option believed cheap on volatility, or selling one believed expensive, and delta-hedging it so that direction is stripp…
Dispersion Trading
Dispersion trading is selling volatility on an index and buying it on the index's constituents, a position that profits when the individual names move mor…
Calendar Trading Concepts
Calendar trading is taking opposing option positions at the same strike but different expiries, so the trade is not a bet on the level of implied volatili…