Trading Volatility and Adjustments with Options
by San Jose Options Mentoring, October of 2008

With in this article we'd like to discuss management tactics which can be beneficial in the organization of an options account. This important concept can be functional to each type of option spread such as the Condors, Calendars, Butterflies, Diagonals, and the rest.

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?

Most option traders make the mistake of obtaining OTM Calls and Puts to change their portfolio at which time the volatility is moving down, and they don't see why their options lose worth so quickly. Each retail option trader should comprehend how volatility affects an option strategy to create intellectual changes to their positions.

A STUDY IN TODAY'S OPTION MARKET

For instance, let's say we are in an Iron Condor and the stock market is trending up near the short strike, and we are getting to the instant where we need to formulate an adjustment to supervise our possible danger. If this is the instance, subsequently the IV may possibly have dropped a small amount. We pull up the chart on volatility of the underlying, and we investigate the IV and see it is oversold and will soon rise again.

There are many option strategies and morphing concepts, so how can we make a good decision on what to do in this case? A critical step in the decision making is graphing the current volatility inside the options market. We usually use the VIX and RVX. Is the volatility bottomed and increasing? Is it at a peak and coming back down? Is it barely moving? What is happening in the options market and where is the volatility in relationship to its history? We additionally need to study the technical analysis of our traded asset. Where is the price headed? We have to comprehend Vega and the other option Greeks to accomplish high probability changes to our positions. In today's example, if the volatility prediction is up, it would make sense to add some positive Vega to our portfolio.

Some positive Vega strategies include Broken Wing Butterflies, Debit Spreads and Calendars. There are many more techniques which we discuss in our mentoring program.

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.

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