Trading Options and 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.
As this is being written in October of 2008 the VIX is as high as it's been. Look at a 5 year chart and see where we are. This level of volatility has made options quite expensive. Before we make any adjustments to our portfolios, we always think about the volatility. Where is it now and where is it going? Should we be buying or selling options at this moment?
Many investors are trading options without an education on option Greeks or volatility. To find consistent success on the markets, one must really understand how volatility affects an option price as well as an option spread. For example, credit spreads rise when the volatility rises. Why? Because when IV rises, the time premium of an option also goes up and increases the price of the contract. This in turn increases the spread. If we don't understand the fundamentals of option trading, we won't know how to make good decisions to manage our accounts.
A STUDY IN TODAY'S OPTION MARKET
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.
Options have endless possibilities. Many traders have no idea what adjustment to make when they see their portfolio in danger. If we learn and deeply understand the fundamentals, then adjustments are much easier. They just make sense. So in this case we may see the VIX is about to rise. We could place a long debit spread on the VIX itself as insurance. We could also use a Calendar spread to the downside. We could also use a Broken Wing Butterfly to the downside. Each of these mentioned strategies can take advantage of a rise in IV since they are positive Vega. Also, if your current portfolio is negative Vega, adding positive Vega can help you hedge any loss that you might incur from a rise in IV. Remember, with option trading we are trading direction, volatility and time.
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.
In summary, prior to doing adjustments to your portfolio or option position, consider the volatility chart of your asset as well as the major markets. This will aid you to make better adjustment choices and reduce risk while maximizing your profits.
Article Source: FxTradingStock.com
About the Author
Learn more about Option Trading and Volatility. Stop by San Jose Options Mentoring and receive a FREE 45 MINUTE VIDEO on Option Greeks and see what this new knowledge can do for you.
by: Donald Scott
Total views: 102
Word Count: 557
Date: Wed, 7 Oct 2009
Publish/Share this article
To use this article on your site click here to get the HTML code
Rating: Not yet rated
Login to vote
Related Articles
How to Invest in 2011 and Beyond Without a ClueWhat Is Forex Trading?
Quick Way To Trade In Shares
ATM Calendar Spreads, Are You Aware Of The Hidden Gotchas?
Emini Day Trading Requirements
The Coming Death Of The Dollar
Fantastic Fundraising Suggestions
Winning Big In The Share Market
