Option Trading Tips from San Jose Options

By Donald Scott


Let's talk about the often misunderstood option Greeks. Beginning option traders only focus on the Greek known as Delta, and although Delta can tell us many things about our option position, there is more to look into. A good trader will focus a lot on volatility in the stock market.

While adjusting the Delta of an option position to manage risk, many option traders don't understand how to use volatility to adjust a position in their favor. There are different types of adjustments that can be done that will not only adjust the Delta, but also adjust the position's sensitivity to the possible volatility of the underlying asset.

Take an option spread called a "Butterfly" for example. The stock market trends up to hit your adjustment point. What kind of adjustment do 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, that probably means the volatility is going down. However, this isn't always the case, so when you make your adjustments, why not put on an adjustment that has something to gain from falling volatility? This is what we call a Negative Vega Adjustment. Or you can make an adjustment that adds positive Vega to your position, in response to a possible whipsaw move in the market.

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.

To conclude, there are several ways to neutralize the Delta position of your option spreads. Always remember, when comparing your adjustment possibilities, 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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Learn about Max Safety, Max Reward Option Trading Course at www.sjoptions.com. Don't be the next to lose your whole trading account on your next Option Trade !