Option Volatility Trading Strategies

Option Volatility Trading Strategies

Option Volatility Trading makes use of the thought of volatility as applied to the stock market. During a particular time, this kind of trading mainly focuses on the magnitude of the distance the stock prices travel. There are times once short term volatility is low. This happens when the stock prices remain in approximately the same range for a long time. On the contrary, there are times when the stock prices rapidly move at various price ranges. Getting stock prices’ Historical Volatility is the key step. It can be obtained by getting the realized value volatility of a financial instrument on a certain time and evaluating it to the average stock prices. The higher the difference among the two, the bigger the opportunity will be. Option volatility trading is usually ignored by investors. However, knowing regarding this will influence your decisions.
Option volatility trading allows you remember whether the option contract being offered to you is under-priced or over-priced. To do this, one needs to look at the Implied Volatility (IV) of the option stock value. It would be best to keep away from when you have analyzed and observed that the options price in the contract is expensive and is over-priced. You must be cautious of option trading strategies such as spreads that have ’sell to open’ positions schemes. On the other hand, it is a good opportunity for you to make investments in when you could see that the options contract is under-priced or is at a discounted level than the standard price. The contract has low Implied Volatility.

How would a trader be familiar with when the contract has high Implied Volatility? In option volatility trading, it is also essential to look at models such as the Black Sholes which is an American Binomial option pricing model. This model calculates the contract’s theoretical value by considering the present market value, its option or exercise value, and the number of days before the option expires. The Implied Volatility is high once the value asked by the bidder is appreciably higher than the regular price.

It is essential to be familiar with option volatility trading because option prices are more complicated compared to other contracts. As opposed to high Implied Volatility, low IV happens once the value is considerably lower than the theoretical value. Low IVs can be seen either as a sign of future price volatility or as a discount given.

At option volatility trading, both Implied Volatility and Historical Volatility must be accounted. Historical Volatility is the average movement of the stock value at a certain time frame which was defined earlier. As an example you’re analyzing at the money (ATM), out of the money (OTM) and in the money (ITM) prices of a certain stock. You have observed that evaluating the prices that the OTM option prices are higher than those of the ATM prices. What do you think is the better alternative? In this case, it is better to buy than to take out a Bull Call Spread or to open the ATM options.

Implied volatility is essential in option volatility trading since option prices will always go back to the original price as long as it has not yet expired. This means that you are not assured that the options value will augment in value even if the IV of a certain option is high. Most of the losses on option volatility trading happen once options go back to its original price. Do not be discouraged. There are also times once the opposite may happen. You can purchase an option at low IV and sell it for a better value during the time once the market is good. To determine whether an option is a good buy or not you should examine the 20 day HV of a stock and its current value IV. It’s a good investment if the stock HV is significantly higher than the option IV.

Knowing how to analyze the volatility patterns and using them to your advantage serves as the key for you to achieve success in your trading ventures in options volatility trading

To learn how to make money in the stock market trading options, attend one of our Power Workshops on Options Trading offered every Thursday for FREEClick HERE to register now.

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