Most investors focus on predicting the direction of a stock. But as this webinar explains, there is often a more reliable edge available: trading volatility itself. In this presentation, I walk through the practical ways option traders can capitalize when implied volatility becomes mispriced — whether through volatility skew, percentile analysis, or strategic spread construction. Rather than attempting to forecast price direction, the goal is to identify situations where the options market’s volatility assumptions are wrong, and structure trades that profit when those assumptions normalize.
The full webinar video is available above for paid subscribers.
Webinar Outline
1. Why Trade Volatility Instead of Direction
Predicting stock prices consistently is extremely difficult
Predicting volatility behavior is often easier
Trading opportunities arise when option market makers misestimate future volatility or price distribution
2. The Two Types of Volatility
Historical Volatility – how fast the underlying has actually been moving
Implied Volatility – the market’s estimate of future movement
Implied volatility is essentially the market’s opinion embedded in option prices
3. Price Distributions and Why They Matter
Markets are often modeled with normal or lognormal distributions
In reality, stock price movements exhibit fat tails and skewness
Understanding this helps explain option pricing distortions and volatility skews
4. Volatility Skew
Forward (positive) skew
Reverse (negative) skew
Horizontal skew (calendar skew)
How skew reflects the market’s expectations of price distribution
5. Strategies for Trading Skew
Depending on the type of skew and volatility level:
Directional strategies
Bull spreads
Bear spreads
Neutral volatility strategies
Ratio spreads
Backspreads
Calendar spreads
Each is designed to sell expensive implied volatility and buy cheaper implied volatility when distortions appear.
6. Forward vs Reverse Skew Trading
Examples of markets where these occur:
Forward skew: commodities, VIX products
Reverse skew: equity indices such as SPX and SPY
The structure of spreads changes depending on the skew type.
7. Measuring Whether Volatility Is Cheap or Expensive
Compare current implied volatility to its historical percentile, not to historical volatility
Options are considered:
Cheap: below the 10th percentile
Expensive: above the 90th percentile
8. Strategies When Volatility Is Cheap
Buy straddles
Backspreads
Calendar spreads
These are long vega trades designed to benefit from rising volatility.
9. Strategies When Volatility Is Expensive
Sell out-of-the-money options
Credit spreads
Ratio spreads
These are short vega trades that benefit if volatility declines.
10. Using Probability and Historical Movement
Before entering volatility trades:
Estimate probabilities using historical volatility
Use Monte Carlo simulations when appropriate
Verify that the underlying has historically moved enough to justify the trade
11. Key Takeaway
The central idea is simple:
When implied volatility becomes mispriced relative to its own history or relative to other options, structured option spreads can exploit the discrepancy.
