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Trading Volatility with Strangles and Delta Hedging

Article Quant Q&A · Author: mbz0
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Summary

The document gives a brief example of trading volatility with options: buy or sell an out-of-the-money strangle, consisting of a call and a put, and delta hedge the combined position using the underlying asset. The hedge is intended to reduce directional exposure so the position is more focused on changes in volatility.

The answer is only a sketch. It does not explain how to choose strikes or expirations, how often to rebalance the hedge, how to manage costs or risk, or what market conditions favor a long versus short position. It also does not discuss non-option approaches, despite the original question asking about them, and offers no performance evidence.

Key ideas

  • A strangle combines an out-of-the-money call and put.
  • Buying or selling a strangle can express a long or short volatility view.
  • Delta hedging with the underlying reduces exposure to directional price moves.
  • The document does not compare non-option volatility strategies or provide performance evidence.

Tags

OptionsVolatilityRisk management
Full text
# What is volatility trading?


# What is volatility trading?












I have heard that there are ways that one can trade volatility with options. What option strategies can be used to do so?

Are the other ways to trade volatility besides with options? If so, what are they?

## Answer by Quantoisseur (score 2)

https://quant.stackexchange.com/a/57149

An example of volatility trading would be constructing pure long/short volatility positions by buying/selling strangles (OTM calls and puts) and then delta hedging the position with the underlying.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.