CHAPTER 39 
Volatility Trading Techniques 
The previous three chapters laid the foundation for volatility trading. In this chapter, 
the actual application of the technique will be described. It should be understood 
that volatility trading is both an art and a science. It's a science to the extent that one 
must be rigorous about determining historical volatility or implied volatility, calculat­
ing probabilities, and so forth. However, given the vagaries of those measurements 
that were described in some detail in the previous chapters, volatility trading is also 
something of an art. Just as two fundamental analysts with the same information 
regarding earnings, sales projection, and so on might have two different opinions 
about a stock's fortunes, so also can two volatility traders disagree about the potential 
for movement in a stock. 
However, volatility traders do agree on the approach. It is based on comparing 
today's implied volatility with what one expects volatility to do in the future. As noted 
previously, one's expectations for volatility might be based on volatility charts, pat­
terns of historical volatility and implied volatility, or something as complicated as a 
GAR CH forecasting model. None of them guarantees success. However, we do know 
that volatility tends to trade in a range in the long run. Therefore, the approach that 
traders agree upon is this: If implied volatility is "low," buy it. If it's "high," sell it with 
caution. So simple: Buy low, sell high (not necessarily in that order). The theory 
behind volatility trading is that it's easier to buy low and sell high (or at least to deter­
mine what's "low" and "high") when one is speaking about volatility, than it is to do 
the same thing when one is talking about stock prices. 
Most of the time, implied volatility will not be significantly high or low on any 
particular stock, futures contract, or index. Therefore, the volatility trader will have 
little interest in most stocks on any given day. This is especially true of the big-cap 
stocks, the ones whose options are most heavily traded. There are so many traders 
812