There are option strategies that are primarily volatility strategies.

These strategies differ from collars or vertical spreads because their profit and loss depends on the magnitude of the underlying assets. Price movements, not its direction.

One of the most common volatility strategies is the straddle.

A long straddle involves taking a simultaneous long position in both a call and a put option on the same underlying assets with identical strike prices and expiration dates.

This creates a position where profits occur.

If the stock moves significantly in either direction, either the call benefits from a sharp price rally or the puts benefits from a steep price decline.

The trade off is the cost because two options are purchased, the premium outlay is relatively high, meaning that the stock must move far enough in either direction to cover this cost before the position becomes profitable.

A similar volatility strategy is the strangle.

Like the straddle.

A long strangle involves buying both a call and a put on the same underlying asset with the same expiration date.

However, instead of using identical strike prices, the call is purchased with a stripe price above the current stock price and the puts with a strike price below it.

This reduces the total premium cost compared to a straddle as both options are out of the money.

The trade off is that the stock must experience a larger price move in either direction before the position becomes profitable since the breakeven points are further apart.

Strangles are often preferred when traders anticipate high volatility, but want to minimize their initial costs.

Let's now look at a concrete example of a long straddle.

Suppose a trader expects a significant move in a stock over the next three months, but is unsure about the direction the stock is currently trading at $50.

To implement a long straddle, the trader buys a three month $50 call option with a premium of $2 80, and simultaneously buys a three month $50 per option for the same premium of $2 80.

The total net premium outlay is $5 60.

Now, let's break down the payoff profiles.

A long call alone provides unlimited upside potential if the stock rallies while Along. Puts a loan benefits from a sharp decline by holding both the trader gains exposure to a large price move in either direction.

If the stock price at expiration moves significantly above or below $50, one of the options becomes profitable while the other expires worthless with profits occurring beyond the breakeven levels of $55, 60 on the upside, and $44 40 on the downside.

However, if the stock price remains close to $50, both options decay in value and the trader suffers a loss equal to the premium paid.

The key advantage of a long straddle is that it allows the trader to profit from volatility without needing to predict direction.

However, this comes with a drawback of a high initial cost since two options are purchased and the need for a large price move to offset the premium outlay.