824 Part VI: Measuring and Trading Volatllity 
However, if there is no news that would seem to explain why the options are so 
cheap or so expensive, then the volatility trader can continue on to the rest of his 
analyses. 
SELECTING THE STRATEGY TO USE 
In general, when one wants to trade volatility, a simple approach is best, especially if 
one is buying volatility. If there is a volatility skew involved, then there may be other 
strategies that are superior, and they are discussed in the latter part of this chapter. 
However, when one is interested in the straight trading of volatility because he thinks 
implied volatility is out of line, then only a few strategies apply. 
If volatility is too low, then either a straddle or a strangle should be purchased. 
One would normally choose a straddle if the underlying instrument is currently trad­
ing near an available striking price. However, if the underlying is currently trading 
between two ~riking prices, then a strangle might be the better choice. In either case, 
a position trader would want to buy a straddle with several months of life remaining, 
in order to improve his chances of making a profit. There is no "best" time length to 
use, so one should use a probability calculator to aid in that decision. The use of prob­
ability calculators will be discussed shortly. 
Example: XYZ is trading at 39.60 and a volatility trader has determined that he wants 
to buy volatility. With this information, he should attempt to buy a straddle with a 
striking of 40 for both the put and the call. 
Suppose that the current date is in December, and the available expiration 
months for XYZ are January, February, April, July, and October, plus LEAPS for 
January of the next year. Then he would analyze each straddle (January 40, February 
40, April 40, etc.) to see which is the best one to buy. It generally seems to work out 
that the midrange straddles have the best probabilities of success, given the way that 
option prices are usually structured. Of course, the actual prices of each straddle 
would be considered when using the probability calculator. In this case, then, the July 
40 or October 40 straddle would probably be the best choices from a statistical view­
point for a position trader. 
If XYZ had been trading at a price of 37.50, say, then the trader would proba­
bly want to consider buying a strangle: buying a call with a striking price of 40 and a 
put with a striking price of 35. From the viewpoint of buying strangles, it does not 
make sense to separate the strikes by more than one striking price unit - 5 points for 
stock options, for example. This just makes the position more neutral to begin with.