Trading Options with Volatility

Many option traders do not have a good grasp on the Option Greeks. The novice option trader only focuses on the Greek we call Delta. Delta can tell us many things about our option position, but the best traders do not stop there. Good traders focus a lot on volatility in the stock market.

When adjusting the Delta of an option position to manage risk, many option traders do not understand how to use volatility to adjust a position in their favor. There are different types of adjustments we can do that will not only adjust the Delta on the trade, but will 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, if you’re trading options, it’s important to follow the volatility chart as well as the price chart.

For example, if the underlying is trending up, that probably means the volatility is going down (but not always the case). So, when making your adjustment, wouldn’t it be better if you put on an adjustment that can benefit from a falling volatility? This is called a Negative Vega Adjustment. Unless you want to prepare for a whipsaw move in the market, then you can always 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.

To conclude, there are several ways to neutralize the Delta position of your option spreads. Always remember, when comparing your adjustment possibilities, 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

Now it’s your chance to learn the craft of Trading Options with Volatility. Get a good Options Mentor or you might not be trading in a few years from now.