Option Trading Adjustments Based on Volatility

In today's article you'll find tips about managing an Options Portfolio based on Volatility in the stock market. We'll explore adjustment concepts that can be applied to any type of option strategy such as the famous Iron Condor, the Butterfly Spread, Calendar Spreads as well as all the others.

Right now as we write this article in 2008, the VIX is at its higher range for the last couple of years, causing options to be expensive. So if making adjustments at the present time, each trader needs to check where volatility is and forecast where it is leading to. Should we really purchase expensive, inflated options, or should we sell them to somebody else? What is the most recent volatility forecast in today's stock market?

A very common mistake that option traders make is buying or selling options at the wrong time. If we buy options when the volatility is at a high, we are entering a trade with odds against us. Option traders that do this don't realize why their options lose value so fast. Every option trading adjustment should be made by thinking of the option Greeks and volatility. We really need to understand these fundamentals to succeed in the options market.

A TYPICAL OPTION POSITION THAT MIGHT NEED AN ADJUSTMENT

Let's say that we have on an Iron Condor, and the market has been in an uptrend for two weeks. If this is the case, then we might be looking at an adjustment right? We are getting close to our short strike, and we need to do something to manage our risk. In this situation the IV of the asset has probably been dropping, since the IV normally moves the opposite direction of the underlying being traded. So, what do we do? Well, if the IV is at support and the technicals indicate that it might rise again, then we'd be looking at doing a positive Vega adjustment.

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.

There are many positive Vega option strategies, but some of the most common ones are Debit Spreads, Broken Wing Butterflies, Short Condors, Short Butterflies and Calendars. In our options mentoring course we cover them in great detail.

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.

Learn more about Option Trading and Volatility. Stop by San Jose Options Mentoring and receive a FREE 45 MINUTE VIDEO on Option Greeks and see what this new knowledge can do for you. Option Trading Adjustments Based on Volatility