This refers to a strategy employed by traders to profit from any significant increase in the volatility of the price of a stock, or any other financial security. A trader employing this strategy pays a premium to purchase separately the right to both buy and sell a stock at a fixed price on a future date. Irrespective of whether the price of the stock drops or shoots up, as long as it moves by a sufficient amount either way, the trader will earn a profit on the trade. If not, his loss will be limited to the premium paid. The strategy is used when a trader expects a significant move in the price of a security but is not too sure about the direction of the move.
