There are two basic ways to trade volatility:
- Buy options with low volatility in hopes that volatility will increase and then sell back those options at a higher price.
- Sell options with high volatility in hopes that volatility will decrease and then buy back those same options at a cheaper price.
Since Bollinger Bands adapt to volatility, Bollinger Bands give options traders a good idea of when
options are relatively expensive (high volatility) or when
options are relatively cheap (low volatility). The chart below of Wal-Mart stock illustrates how Bollinger Bands can be used to trade volatility:
