Chapter 39: Volatility Trading Techniques 833 
In reality, one would have to be mindful of not buying overly expensive options ( or 
selling overly cheap ones), because implied volatility cannot be ignored. However, the 
price of the straddle itself, which is what determines the x-axis on the histogram, does 
reflect option prices, and therefore implied volatility, in a nontechnical sense. This author 
suspects that a list of volatility trading candidates generated only by using past movements 
would be a rather long list. Therefore, as a practical matter, it may not be useful. 
MORE THOUGHTS ON SELLING VOLATILITY 
Earlier, it was promised that another, more complex volatility selling strategy would 
be discussed. An option strategist is often faced with a difficult choice when it comes 
to selling (overpriced) options in a neutral manner - in other words, "selling volatili­
ty." Many traders don't like to sell naked options, especially naked equity options, yet 
many forms of spreads designed to limit risk seem to force the strategist into a direc­
tional (bullish or bearish) strategy that he doesn't really want. This section addresses 
the more daunting prospect of trying to sell volatility with protection in the equity 
and futures option markets. 
The quandary in trying to sell volatility is in trying to find a neutral strategy that 
allows one to benefit from the sale of expensive options without paying too much for 
a hedge - the offsetting purchase of equally expensive options. The simple strategy 
that most traders first attempt is the credit spread. Theoretically, if implied volatility 
were to fall during the time the credit spread position is in place, a profit might be 
realized. However, after commissions on four different options in and possibly out 
(assuming one sold both out-of-the-money put and call spreads), there probably 
wouldn't be any real profit left if the position were closed out early. In sum, there is 
nothing really wrong with the credit spread strategy, but it just doesn't seem like any­
thing to get too excited about. What other strategy can be used that has limited risk 
and would benefit from a decline in implied volatility? The highest-priced options are 
the longer-term ones. If implied volatility is high, then if one can sell options such as 
these and hedge them, that might be a good strategy. 
The simplest strategy that has the desired traits is selling a calendar spread 
that is, sell a longer-term option and hedge it by buying a short-term option at the 
same strike. True, both are expensive (and the near-term option might even have a 
slightly higher implied volatility than the longer-term one). But the longer-term one 
trades with a far greater absolute price, so if both become cheaper, the longer-term 
one can decline quite a bit farther in points than the near-term one. That is, the vega 
of the longer-term option is greater than the vega of the shorter-term one. When one 
sells a calendar spread, it is called a reverse calendar spread. The strategy was