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, 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.
Picture this; say you're in an option spread called a Butterfly, and the stock market trends up to hit your adjustment point. What kind of adjustment should 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, it's most likely that the volatility is going down (but not always the case). So, when making your adjustment, why not put on an adjustment that benefits from a falling volatility? This is what we call a Negative Vega Adjustment. Or, if you want to prepare for a whipsaw move in the market, you can always do an adjustment that adds positive Vega to your position.
Learning some technical analysis skills is the best thing you can do to help you make decisions on what type of adjustments you should make. Forecast the price of the underlying, and its implied volatility, when you're 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
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.
Picture this; say you're in an option spread called a Butterfly, and the stock market trends up to hit your adjustment point. What kind of adjustment should 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, it's most likely that the volatility is going down (but not always the case). So, when making your adjustment, why not put on an adjustment that benefits from a falling volatility? This is what we call a Negative Vega Adjustment. Or, if you want to prepare for a whipsaw move in the market, you can always do an adjustment that adds positive Vega to your position.
Learning some technical analysis skills is the best thing you can do to help you make decisions on what type of adjustments you should make. Forecast the price of the underlying, and its implied volatility, when you're 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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