Second-order volatility trades involve a mix of long and short options with varying strikes or maturities. They go beyond the simplicity of first-order trades (like straddles or strangles) by leveraging nuanced relationships between the options greeks — gamma, vega, and theta.
Key characteristics of second-order trades include:
- Gamma Flips: Gamma changes from positive to negative as the underlying price moves between strikes.
- Vega Dynamics: Vega can switch signs, influencing sensitivity to implied volatility changes.
- Nonlinearity: These trades create complex payoff structures that can’t always be visualized in simple two-dimensional charts.
For MSTR, whose volatility is fueled by its Bitcoin exposure, second-order trades offer a way to harness these dramatic price movements.
