Volatility Capture is a trading strategy focused on profiting from anticipated changes in the level of market volatility, rather than solely from directional price movements of an underlying asset. It seeks to capitalize on shifts in either realized or implied volatility.
Mechanism
This strategy involves constructing options positions that are specifically sensitive to volatility, such as straddles, strangles, or iron condors. These structures are designed to gain value when actual volatility deviates from the market’s expectation (implied volatility) or when volatility trends in a favorable direction.
Methodology
The methodology entails rigorous analysis of historical volatility, implied volatility derived from options prices, and prevailing market sentiment to forecast future volatility conditions. Traders deploy strategies that involve buying options when expecting volatility to increase (long volatility) or selling options when expecting it to decrease (short volatility), carefully managing position risk through specific options combinations.
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