Long Volatility

When you expect a big move but don't know which way. For example, before earnings - you know the stock will move but can't predict if it's up or down. Long volatility profits from movement in either direction.

Maximum loss is the total premium paid for both options. This occurs if the stock is exactly at the strike at expiration (rare). In practice, you'd likely close before expiration if the position is losing.

Straddle uses ATM options (same strike); Strangle uses OTM options (different strikes). Strangle costs less but needs a bigger move to profit. Use straddle for smaller expected moves; strangle for very large expected moves.

Depends on thesis. Typically close when: (1) IV reaches target, (2) stock moves enough, (3) approaching 21 DTE (theta accelerates), or (4) thesis is invalidated. Don't hold to expiration unless move has occurred.

Theta is time decay - how much value your options lose each day. Long options have negative theta, meaning they lose value daily. This is the cost you pay for the opportunity to profit from movement.

Use IV Rank or IV Percentile. IV Rank < 30% means volatility is in the lower part of its yearly range (cheap). Compare current IV to 52-week range and historical realized volatility.

Usually not optimal. IV typically drops 20-50% after earnings (IV crush). Unless the stock moves VERY significantly, the IV crush can exceed movement gains. Consider selling before earnings if IV has already risen.

Gamma scalping is repeatedly hedging delta to profit from oscillations. It can generate profits to offset theta. It's complex, requires active management, and works best when realized vol exceeds implied vol. Most retail traders should just manage the straddle/strangle directly.

Upper breakeven = Strike + Total Premium. Lower breakeven = Strike - Total Premium. Example: S$33 straddle costing S$1.75 → breakevens at S$34.75 and S$31.25. Stock must move beyond these levels for profit at expiration.

IV is forward-looking (market's expectation from option prices). Historical volatility (HV) is backward-looking (actual past movement). Long vol works best when IV < expected future realized vol. Compare them to gauge if options are cheap.

In contango (normal), near-term IV < far-term IV. In backwardation, near-term IV > far-term IV. Trade via calendars: long back-month + short front-month if expecting term structure to normalize. Monitor for parallel shifts vs steepening/flattening.

Skew means OTM puts typically have higher IV than equidistant OTM calls. This makes your put more expensive than the call. Account for this when sizing or selecting strikes. Skew changes also affect P&L independent of ATM IV changes.

Variance swaps (directly trade realized vs implied variance), volatility swaps, VIX futures/options, or weighted option strips. These isolate volatility from delta. Retail access is limited; use straddles/strangles as proxy.

During major market dislocations (crashes, crises) when realized vol exceeds what was implied. These are the times long volatility can have outsized returns. However, timing is difficult, and you pay theta waiting.

Track aggregate vega and vega by expiration bucket. Balance long and short vega exposure if desired. Understand correlation - all vega positions may move together in crisis. Use scenario analysis for various IV shocks.