Day 61 – Advanced Volatility Trading and Structuring for Professionals

Move from trading price to trading volatility itself. Learn how pros analyze, structure, and profit from volatility on Derive.

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Professional options traders do not just bet on price moves, they trade volatility as its own asset class.
Understanding how to structure volatility trades, hedge dynamically, and manage vol risk is critical for institutional and advanced retail participants.

Today, we open the advanced volatility module with a deep dive on pro volatility trading and structuring on Derive.

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1. Volatility as an Asset: What Pros Trade

• Directional Volatility Bets:

  • Buying straddles, strangles, or outright options when expecting large moves.

  • Selling premium when expecting low realized volatility.

• Relative Volatility Trades:

  • Trading spreads between maturities (calendar spreads), strikes (vertical spreads), or assets (dispersion).

  • Betting on changes in the shape of the vol surface (skew, smile, term structure).

• Event Volatility:

  • Trading pre and post event moves where IV is mispriced versus realized or expected outcome.

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2. Structuring Volatility Trades on Derive

• Straddles and Strangles:

  • Buy both a call and put (straddle) or buy OTM call and put (strangle) at the same expiry for pure volatility exposure.

• Calendar and Diagonal Spreads:

  • Buy and sell options at the same strike but different expiries (calendar), or different strikes and expiries (diagonal) to bet on vol term structure.

• Risk Reversals and Skew Trades:

  • Trade call and put spreads to bet on changes in the skew between wings of the vol surface.

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3. Measuring and Analyzing Volatility

• Implied Volatility (IV):

  • What the market is pricing in for future movement.

• Realized Volatility (RV):

  • What actually happens in the spot market over a period.

• Vol Surface:

  • Analyze how IV changes by strike and expiry to find rich or cheap volatility pockets.

• Vol Premium:

  • The difference between IV and RV, which informs when to buy or sell options.

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4. Managing Volatility Risk

• Vega Exposure:

  • Measure portfolio Vega and know how PnL changes with moves in IV.

• Dynamic Hedging:

  • Adjust delta and gamma exposures as spot and IV move.

• Event Risk:

  • Be aware of known events and manage accordingly. IV often collapses after an event (vol crush).

• Scaling and Sizing:

  • Limit position size in illiquid or volatile contracts, monitor margin and VaR.

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5. Common Pro Strategies

• Buy Vol Before Big Events:

  • Enter straddles or strangles before news, exit before the event to monetize rising IV.

• Sell Vol After Events:

  • Sell premium after IV spikes post event or in calm markets.

• Calendar Roll Trades:

  • Capture IV differences between near and far expiries.

• Dispersion Trades:

  • Long volatility in one asset, short in another (for example, BTC vs ETH) when vol surfaces diverge.

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6. Execution Tips on Derive

• Use RFQ for multi leg or size, especially in less liquid markets.

• Monitor Greeks and IV analytics for every position.

• Trade in subaccounts for risk isolation and clear reporting.

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Your Action Today

• Pick one volatility structure (straddle, calendar, skew trade) and review the IV and RV analytics for that contract.

• Backtest the vol premium, was IV cheap or rich before recent moves?

• Plan a small vol trade, with clear rules for entry, management, and exit.

Tomorrow, we will continue with advanced vol arbitrage and market making for institutional users.

Hasta manana
Cpt