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Options Strategy for Change in Market Volatility

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If you take the view that volatility will drop over the next three months and then increase thereafter, what options strategy would you like to execute? Would the value of this portfolio today be positive or negative?

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Solution Summary

The following posting discusses options strategies for changes in market volatility.

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Volatility

Volatility provides relative rate at which price or return of a stock change or fluctuate over time. However, volatility does not provide for the direction in which the price will change but only provides the price dispersion. Different categories of assets do experience fluctuations in prices thus recording high or low volatility. Securities and other asset prices do fluctuate and sometimes the fluctuations can occur quickly while other periods the fluctuation may take a long period. When assets prices changes quickly it could result in increased change in the same direction or unusual change in the opposite direction.

Different option strategies are used in the life of an asset depending on its volatility. When an asset has high volatility it leads to greater prices and its price moves great distances and this is due to the need to include risk reward in pricing.

There are different option strategies that can be used when an asset has low volatility. The first strategy that I would use in low volatility is short straddle which is a high ...

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