Advanced QuantLesson 2
Volatility Trading Strategies
Learn to trade realized vs. implied volatility and exploit volatility regimes.
13 minute read
4 key takeaways
Trading Volatility, Not Prices
Some of the best traders focus on volatility instead of direction. If you can predict volatility better than implied volatility, you have a real edge.
Implied vs. Realized Volatility
- Implied Volatility (IV): What the market prices into options RIGHT NOW
- Realized Volatility (RV): The actual volatility that occurred (historical)
- If IV > RV: Options are overpriced → SELL them
- If IV < RV: Options are underpriced → BUY them
python
# Calculate realized volatility
returns = np.log(close_prices / close_prices.shift(1))
realized_vol = returns.rolling(20).std() * np.sqrt(252) # Annualized
implied_vol = get_option_implied_vol() # From market
# Find trades
if implied_vol[-1] > realized_vol[-1] * 1.05: # IV is 5% higher than RV
signal = "SELL volat (short straddle)"
elif implied_vol[-1] < realized_vol[-1] * 0.95:
signal = "BUY volatility (long strangle)"
The VIX: The Fear Gauge
- VIX < 15: Complacency, low volatility environment
- VIX 15-30: Normal
- VIX > 30: Fear, flight-to-safety
- VIX > 50: Extreme fear (rare)
- VIX spikes up sharply but mean-reverts (usually)
Using VIX as a Regime Filter
python
vix = get_vix()
if vix < 20:
# Low volatility regime
# Short volatility strategies work (iron condor, short straddle)
# Long volatility strategies lose
strategy_mode = "SHORT_VOLATILITY"
elif 20 <= vix <= 35:
# Normal volatility
strategy_mode = "NEUTRAL"
else: # vix > 35
# High volatility regime
# Long volatility strategies work
# Short volatility strategies break (volatility explodes)
strategy_mode = "LONG_VOLATILITY"
Iron Condor: Short Volatility
Sell both a put spread and call spread. Profit from theta decay in low vol environments.
Volatility Crashes Are Violent
Volatility doesn't gradually increase—it SPIKES. A short volatility strategy can lose 50% in a week. Always know your max loss per trade. Never sell options without a defined stop.
Key Takeaways
- IV > RV: Options expensive, sell them
- IV < RV: Options cheap, buy them
- VIX is the fear gauge—use it as a regime filter
- Volatility is mean-reverting but with crashes