Trading Option With Volatility

A lot of option traders don’t fully understand Option Greeks. The inexperienced option trader only focuses on the Greek known as Delta. Although Delta can tell us a lot about our option position, the best traders don’t stop there. A good trader will focus on volatility in the stock market.

When adjusting the Delta of an option position to manage risk, it’s important to understand how to use volatility to adjust a position in their favor, sadly many traders don’t. There are different types of adjustments that can be done to not only adjust the Delta on the trade, but also adjust the position’s sensitivity to the implied volatility of the underlying asset.

For example, let’s say you are in an option spread called a Butterfly, and the stock market trends up to hit your adjustment point. What kind of adjustment do you make?

Well, since we are trading options, it’s important to follow the volatility chart along with the price chart.

Think of it this way, if the underlying is trending up, it usually means the volatility is going down, but not always. So when making your adjustment, try an adjustment that benefits from a falling volatility! It’s called a Negative Vega Adjustment, unless you want to prepare for a whipsaw move in the market, then you should do an adjustment that adds positive Vega to your position.

Learning some technical analysis skills can really help you make decisions on what type of adjustments you want to make. Forecast both the price of the underlying and its implied volatility when you are studying the charts.

When making adjustments to your option trades, it’s always a good idea to keep Vega in mind. Ignoring this can seriously put a damper on your potential for long term returns.

In conclusion, there are many ways to neutralize the Delta position of your option spreads. So when comparing your adjustment possibilities, remember to analyze the volatility graph to choose the best Vega adjustment at the same time. Videos on this topic and others can be seen at www.sjoptions.com

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