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"Trading Volatility on Index Options?"

Question By Betu "How to trade volatility through index options ? What are the rules to kept in mind while trading volatility ?" Asked on 3 May 2011 (updated in Oct 2021)

Answered by Mr. OppiE

Hi Betu,

Trading volatility is one of the more advanced aspects of options trading and I trust that you have the necessary experience and background in the more basic aspects of options trading before undertaking this.

The most direct means of trading volatility on the market is through buying VIX Options. The VIX, Volatility Index, is calculated based on S&P500 options. As such, if you expect volatility to rise on the S&P500, all you have to do is buy call options on the VIX. Similarly, if you expect volatility to drop, all you have to do is buy put options on the VIX.

However, if you wish to speculate on volatility through Index Options directly, you could use options strategies such as the Straddle. To speculate on volatility rising, you could use a Long Straddle or the Short Straddle to speculate on volatility dropping. A few tips to note for such strategies is that:

1. Options Vega, the greek governing an option's sensitivity to changes in implied volatility, rises with longer expiration. As such, index options with longer expiration should be used for speculating on volatility.

2. In order to make sure you are speculating only on volatility and not be affected by the directional risk of the underlying index, you should also make sure your resultant position is Delta Neutral.

3. Volatility tends to rise when market falls, as such, betting on volatility also takes on somewhat of a directional bet.

You might want to make sure you are totally familiar with the concept of Implied Volatility and Vega before proceeding.


In conclusion, you can speculate on index volatility either directly through VIX options or volatile options strategies using options on the index itself. It is important to be totally familiar with advanced options concepts such as greeks and volatility and have plenty of paper trading experience before trading volatility for real.

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