As the big QE2 announcement draws nearer, we are seeing volatility caused by uncertainty as to the effect it will have on the markets. While volatility might make some investors nervous, traders can capitalize on it with the right options strategy.

Today we’re looking at a volatility trade in Alcoa Inc. (NYSE: AA). The stock recently bounced off of a double-bottom and may have topped out for the short term.

The trade strategy we will use using is a short butterfly spread, which will profit if AA declines or rises significantly. The spread pays a credit up front, and we are forecasting a fairly large move in the stock the near term, which would be good for our profitability.

Trade: AA short butterfly spread entered for a 36-cent credit

Buy to open AA Nov 13 Calls (two contracts)
Sell to open AA Nov 12 Calls (one contract)
Sell to open AA Nov 14 Calls (one contract)

Profit: Profit from a large price move in AA.

Max Loss: $64 per spread

Max Gain: $36 per spread

Breakeven at Expiration: AA below $12.36 or above $13.64

This is an advanced options strategy, so it may take a little effort, but it is worth it. A short butterfly spread allows us to enter a trade with a small credit, and still has good profit potential and fixed risk. It is the best of both worlds in options, but it does have risks and should be managed carefully.

To learn more about this trade, watch the video here.

Disclaimer: It is important to understand the risks of trading options before you attempt a trade like this. This article is for educational purposes only.

This article is brought to you by LearningMarkets.com.