Most novice options traders don't have a good grasp on Option Greeks, and they tend to only focus on the Greek we call Delta. Delta can be informative when it comes to our option position, but the best traders know to look deeper and will focus a lot on volatility in the stock market.
When you adjust the Delta of an option position to manage risk, you need to understand how to use volatility to adjust a position in your favor. There are different types of adjustments that can be done that will not only adjust the Delta on the trade, but 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, 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.
Remember, it's always a good idea to keep Vega in mind while you are making adjustments to your option trades. If you don't, you can seriously limit the potential of your 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 you adjust the Delta of an option position to manage risk, you need to understand how to use volatility to adjust a position in your favor. There are different types of adjustments that can be done that will not only adjust the Delta on the trade, but 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, 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.
Remember, it's always a good idea to keep Vega in mind while you are making adjustments to your option trades. If you don't, you can seriously limit the potential of your 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
About the Author:
There are many Option Courses on the market today, but there are not many that teach Trading Options with Volatility.
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