Directional betting usually receives the spotlight but its volatility trading that really captures the imagination. Today we’re going to begin giving the latter its due. This message will clarify the difference between the two and help you understand the two primary ways traders can bank on volatility.

This will likely turn into a multi-part series that takes a deep dive into the exciting world of trading speed and magnitude.

Directional trades require you to forecast the direction of the stock’s next move. Up or down? That is the question.

Volatility trades require you to forecast the magnitude or even speed of price movement. Move a lot or move a little? That is the question.

There are two basic types of volatility trades: long and short.

Sidebar: I’m going to be using the term “volatility” a lot in this piece so let’s use the traders’ abbreviation which is “vol,” okay?

In a long vol trade, you are betting the stock is going to move more than expected. The direction of the move doesn’t matter. The size of the move does. These types of trades are also called bi-directional.

There are four core bi-directional strategies: long straddles, long strangles, inverted butterflies, and inverted condors (otherwise known as debit condors or the Transformers-inspired moniker: debicons).

The ideal setup for a long vol trade includes price and volatility criteria. From a price perspective, we’re seeking a stock that is poised for a big move. Maybe it’s a stock with pending news. Or perhaps it’s a stock that is coiling and ready to pop.

Take Amazon for instance. Someone slipped the e-commerce giant an Ambien in January, and it’s been snoozing ever since. The narrow box it’s stuck in has caused some serious squeezing by the Bollinger Bands indicator. There could be some serious energy that releases when the stock finally awakes from its slumber.

The other piece to this setup is implied volatility. The easiest long vol trades arise when options are cheap. And nothing says cheap like a low implied volatility reading. Short of a brief stint last June, Amazon’s IV rank is the lowest it’s been all year.

In a short vol trade, you are betting the stock is going to move less than expected. Once again, the direction of the stock’s movement doesn’t matter as much as the size of the move does. These types of trades are usually neutral.

Mirroring the four core bi-directional strategies is a quartet of neutral plays: short straddles, short strangles, butterflies, condors. Indeed, the short volatility trader lies on the opposite end of the bi-directional trader. The short vol trader is selling the strategies that the long vol trader is buying.

In that sense, it’s kind of like a zero-sum game. What’s good for one guy is bad for the other and vice versa.

The ideal environment for a short vol play would be a stock that is expected to settle down or knock out a trading range – that’s the price criteria. For the volatility piece, we’re looking for expensive options as reflected by high implied volatility.

Take Boeing for instance. With last Sunday’s tragic plane crash casting suspicion on their top-selling 747 MAX planes, the stock is experiencing all sorts of turbulence. Implied vol shot through the roof on Monday breathing new life into its previously deflated options.

If you think the uncertainty is overblown and the stock will move less than expected, then a short vol trade could be the way to go.

Tuck this article away for safekeeping. Pull it out in the future next time you need to brush up on the basics of volatility trading. Join me next week where we’ll continue our exploration.