Is there any way to do a pure play on volatility?
That is, an option strategy that will return a profit if volatility rises, irrespective of price?
I don't know of any. There are strategies where an increasing volatility will improve profitability, but none where a price move cannot undo it.
I guess what I would like are cash-settled options on a volatility index...
While I think downside is more likely than upside, I am seeing some things that do not make me terribly confident about a sustained market drop from here. In particular, looking at individual stocks, a lot of beaten-up small caps seem at the beginning of a blast-off phase...
A straddle or strangle would make sense here, with options cheap. A put backspread may be attractive, given my downside bias tempered by considerable doubt.
I do think that we will get at least a short-term downside reaction in fairly short order. What I am uncertain about is the follow-through. Given that, perhaps the best option strategy is a simple long put, following it up later by converting the position to a bear spread if it goes my way, potentially to collar the position.
I am leaning toward the purchase of an at-the-money put, with a follow-up of the purchase of an at-the-money (i.e. lower-strike) call if the initial drop I expect materializes. Since calls are generally priced lower than puts, that fact, along with some loss of time premium, will help minimize the cost of the combination.
Other ideas? |
