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What options traders mean when they say they are 'buying volatility'

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Mike Khouw breaks down the 'buying volatility' concept and provides a trade on a software stock.

Institutional options traders frequently refer to "buying" or "selling" volatility, but what does this mean? Is this something individual self-directed investors can do? Buying volatility refers to a trading strategy seeking to profit from an expected increase in the price fluctuation of the underlying security, market index or futures. An investor purchases financial instruments that benefit from higher volatility to accomplish this.

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