Here is the quick and dirty recipe for making money off volatility.
Buy a put and a call option for the same strike price. On both options place a trailing stop at a fixed point ( <- that's where skill / statistical analysis comes in ) After one of those two orders execute cancel the second order and place a new trailing stop at a lower value to prevent additional loss.
If the stock goes up you sell the put and ride the call until the price drops or you liquidate.
If the stock falls you sell the call and ride the put.
Your risk is total to the loss in time value of the option for the duration of your trade , and is capped at a maximum of the sum total of the two trailing limits on your initial purchase. If you would like me to run the numbers for it please give me a security and I can even tell you where to set your puts ( I have computer programs I use to calculate reasonable stops , and execute this particular strategy )
So basically you can lose everything you put in. This is a slot-machine strategy. It's a load of crap.
Anything bought on margin or of a derivative nature is like this. You can bust out hard.
The thing with buying an actual security is a 5% drop is only a 5% drop in value, whereas in an option a 5% drop could translate to a gigantic liability.
trailing stops limit your risk to a percentage of your initial investment. Its the same thing as with purchasing a stock. That investment can also lose all its value overnight. Its less likely to happen ( less risk ) and its also less likely to really increase much ( less reward ). All options do is scale up the risk/reward.
It's extremely rare that a security loses all of its value in a short period of time. In the last twenty years I can think of only a few occasions where it's happened that quickly, and it's almost always front-page news.
Options, on the other hand, are constantly declining to zero value. It's how they work. If you end up out of the money at the end of the day, you bust out on that bet.
Buy a put and a call option for the same strike price. On both options place a trailing stop at a fixed point ( <- that's where skill / statistical analysis comes in ) After one of those two orders execute cancel the second order and place a new trailing stop at a lower value to prevent additional loss.
If the stock goes up you sell the put and ride the call until the price drops or you liquidate.
If the stock falls you sell the call and ride the put.
Your risk is total to the loss in time value of the option for the duration of your trade , and is capped at a maximum of the sum total of the two trailing limits on your initial purchase. If you would like me to run the numbers for it please give me a security and I can even tell you where to set your puts ( I have computer programs I use to calculate reasonable stops , and execute this particular strategy )