Option Trading Adjustments Based on Volatility
In today's article you'll find tips about managing an Options Portfolio based on Volatility in the stock market. We'll explore adjustment concepts that can be applied to any type of option strategy such as the famous Iron Condor, the Butterfly Spread, Calendar Spreads as well as all the others.
At the time that this article is being presented (the latter part of 2008), the VIX is presently in its higher range of the previous couple years, making options inflated in value. So while making adjustments nowadays, each trader must make it his duty to know where volatility is and forecast where it is leading to. Should we acquire expensive, inflated options or do we persuade somebody else to buy them? What is the latest volatility forecast on the major markets?
A very common mistake that option traders make is buying or selling options at the wrong time. If we buy options when the volatility is at a high, we are entering a trade with odds against us. Option traders that do this don't realize why their options lose value so fast. Every option trading adjustment should be made by thinking of the option Greeks and volatility. We really need to understand these fundamentals to succeed in the options market.
A TYPICAL OPTION POSITION THAT MIGHT NEED AN ADJUSTMENT
Let's say that we have on an Iron Condor, and the market has been in an uptrend for two weeks. If this is the case, then we might be looking at an adjustment right? We are getting close to our short strike, and we need to do something to manage our risk. In this situation the IV of the asset has probably been dropping, since the IV normally moves the opposite direction of the underlying being traded. So, what do we do? Well, if the IV is at support and the technicals indicate that it might rise again, then we'd be looking at doing a positive Vega adjustment.
Ok, so now we have determined that the IV is on support, and we think it's going to rise. Well, this means that the market might come back down also. So, do we do nothing at all? Well, that might not be such a good idea because our current position is at risk. So even though we forecast the market is coming back down, we still put some insurance on our trade. We have to avoid catastrophic losses if we want to be successful in the long run. So, in this case, we hedge our portfolio or position with a positive Vega strategy, one that will benefit from a rise in IV.
There are many positive Vega option strategies, but some of the most common ones are Debit Spreads, Broken Wing Butterflies, Short Condors, Short Butterflies and Calendars. In our options mentoring course we cover them in great detail.
To summarize, when your option trades come to an adjustment point, always think about the IV of your asset. If you can make decisions based on volatility, direction, and time, then your option trading skills will be much better. It's the little things like this that make a difference at the end of the year. - 23208
At the time that this article is being presented (the latter part of 2008), the VIX is presently in its higher range of the previous couple years, making options inflated in value. So while making adjustments nowadays, each trader must make it his duty to know where volatility is and forecast where it is leading to. Should we acquire expensive, inflated options or do we persuade somebody else to buy them? What is the latest volatility forecast on the major markets?
A very common mistake that option traders make is buying or selling options at the wrong time. If we buy options when the volatility is at a high, we are entering a trade with odds against us. Option traders that do this don't realize why their options lose value so fast. Every option trading adjustment should be made by thinking of the option Greeks and volatility. We really need to understand these fundamentals to succeed in the options market.
A TYPICAL OPTION POSITION THAT MIGHT NEED AN ADJUSTMENT
Let's say that we have on an Iron Condor, and the market has been in an uptrend for two weeks. If this is the case, then we might be looking at an adjustment right? We are getting close to our short strike, and we need to do something to manage our risk. In this situation the IV of the asset has probably been dropping, since the IV normally moves the opposite direction of the underlying being traded. So, what do we do? Well, if the IV is at support and the technicals indicate that it might rise again, then we'd be looking at doing a positive Vega adjustment.
Ok, so now we have determined that the IV is on support, and we think it's going to rise. Well, this means that the market might come back down also. So, do we do nothing at all? Well, that might not be such a good idea because our current position is at risk. So even though we forecast the market is coming back down, we still put some insurance on our trade. We have to avoid catastrophic losses if we want to be successful in the long run. So, in this case, we hedge our portfolio or position with a positive Vega strategy, one that will benefit from a rise in IV.
There are many positive Vega option strategies, but some of the most common ones are Debit Spreads, Broken Wing Butterflies, Short Condors, Short Butterflies and Calendars. In our options mentoring course we cover them in great detail.
To summarize, when your option trades come to an adjustment point, always think about the IV of your asset. If you can make decisions based on volatility, direction, and time, then your option trading skills will be much better. It's the little things like this that make a difference at the end of the year. - 23208
About the Author:
Learn what Maximum Safety, Maximum Reward Option Trading is all about, and visit www.SJOptions.com to receive your FREE Options Trading Video on Option Greeks.
posted by X - Men @ 4:16 AM
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