Newbie here with a related question:How would one position to take advantage of a forecast of rising implied volatility, that is not only delta neutral, but also theta neutral?

QuoteOriginally posted by: orangeman44I suggested that, he says variance swap is too fancy for him.not fancy. it's the easiest way of punting realized var. pure straight directional bet on it, much easier than a vanilla option.no hassle, no hedging, no tears (assuming you get the direction right)

QuoteOriginally posted by: slowboyNewbie here with a related question:How would one position to take advantage of a forecast of rising implied volatility, that is not only delta neutral, but also theta neutral?and a free lunch as well?:-)joking apart, think of some kind of calendar spread: you'll be long vega, short gamma alas. you won't stay delta neutral very long.or buy a variance swap, and sell it back after implieds have risen. hoping not to have lost more money in the realized meantime.

one other consideration on the three choices: skew. one might choose one strike over another based on skew preference. either one might want the "cheaper" option to scalp gammas more cheaply or choose the "richer" option because it will perform better. for instance, one might choose an otm put on a stock because if the stock moves up, the otm call will likely get crapped all over. on the other hand it is probably available at a lower vol for a "buy and holder" and if the stock moves it won't matter anyway.

listen, if your buddy wants to take a bet on the underlying going up, now is a historically good time to do so with a call rahter than the stock itslef as vols are really low and interest rates are still very low. He coudl also make money on implieds going up. but if he doesn't hedge with the underlying it is not strictly a bet on implied vol, in fact, the anticipated implied vol move, (depending on strike and maturity of course) will be a much less important factor in his pnl than the spot

Thanks everyone for feedback here and thru private messages . The guy (he exists, I am not asking this using him as a cover) is long in the stock, has made money on it, feels it will move higher, took some profit, wants to buy calls, doesn't want to hedge. He wants a directional bet, implied vol is low relative to historical. I told him some things I learned from my experience, mostly in line with what Beans is saying here. I may not have presented the question correctly, opening myself to some ridicule.

What is the story about the low volatility? Do u anticipate it to stay low?How about vol of vol? Is vol of vol falling?

How about vol of vol of vol.... where do you think that is going?

FDAX,I was wanting to buy some butterflies on vol of vol of vol...i dont want to be hedged though. can you sell me some?

Actually the straddle is a very rough way of playing a long volatility position, because you find yourself long theta, which happens to be negative in this position.One much better way of doing things is to create "Straddle/Strangle Calendar Spread":Sell Long dated ATM calls, Buy Short dated ATM callsSell Long dated ATM puts, Buy Short dated ATM putsWhat happens is that the longer dated options capture a rise in volatility to a far greater extent, plus the trade benefits from time decay.One can structure it as they like depending on their view on the underlying's realised volatility. I tend to sell slightly OTM calls and slightly OTM puts, as far OTM as I think the underlyinh might move. Of course this is perferctly done if you stay delta neutral the whole time (e.g. dicrete heding).The problem is that you have a small gamma, which is VERY undesirable in times of crashes. BUT it is also possible to neutralize gamma completely by buying another ATM straddle (strangle) with expiry somewhere in between "Short Dated" / "Long Dated".Ideally you would want to leave a small positive gamma (which is going to rise as time goes by). This position is quite beautifull really, but can only be done on index options as opposed to single stock, the latter being able to jump 100% overnight, thus rendering the discrete hedging delta neutral impossible.

...straddle is long theta...selling calendar spreads in anticipation of implied rise...sounds great!!! Are you doing it in big size?

Obviously you still need to be delta neutral. I assure you this position captures IV very well, provided you chose your Strangle sufficiently outside the current prices !The proper way would normally be:- Set your expected Vega (The longer dated are the options the better, though not too far because LEAPS don't usually move as much with IV)- Ensure you remain gamma neutral (as much as possible, or slightly positive ideally)- Choose 2 long dated options depending on how high you think the underlying might move, one call, one put, sufficiently far from the money.Calculate the resulting greeks from this position, at this point it should be a high vega, low gamma, and almost zero delta (ideally).- Choose 2 short dated options quite close to ATM, one call and one put, such that the overall gamma is then slightly positive to zero, positive is better because in cases of crashes you will still win... The numbers to chose not necessarily being the same as the long term ones.Then calculate the overall resulting delta, and go short/long the corresponding number of underlyings, to stick it to zero.You have created a position that will be very sensitive to a change in IV...

I forgot to say: The long term options are LONG, whereas the whort term ones are SHORT !!! theta is slightly positive so that the trade also makes money as time passes by.You should normally choose the strikes of the long term options to be less than the current one based on the correlation between the IV of the underlying and today's prices... if IV goes up then that means essentially the index/underlying is going down...

Delta neutral, positive vega, long gamma and positive theta! Sounds great in this market, but does this position hold?Maybe we can do a direct deal, I was thinking ODAX or maybe OESX? (otherwise daxie would be sad)

ManuLondon, I am not sure you know what you are talking about You are lucky that some partcipants have recently been banned Best regards