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 adjusting the Delta of an option position to manage risk, it’s important to understand how to use volatility to adjust a position in their favor, sadly many traders don’t. There are different types of adjustments that can be done to not only adjust the Delta on the trade, but also adjust the position’s sensitivity to the implied volatility of the underlying asset.
Let’s say you are in an option spread called a Butterfly, and the stock market trends up to hit your adjustment point. What should you do?
Always remember, when trading options, it’s important to follow the volatility chart along side 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.
You can learn some technical skills that can really have you make decisions on what type of adjustments need to be made. The ability to forecast both the price of the underlying and its implied volatility when you are studying the charts can be a big help.
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.
So remember, when comparing your adjustment possibilities; remember to analyze the volatility graph so you can choose the best Vega adjustment. To see videos about the many ways to neutralize the delta position of your option spreads and other adjustments, visit 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.
