Comments on: Why Options Traders Must Watch Implied Volatility

By: The World's Worst Stock Picker

The World's Worst Stock Picker — Fri, 12 Sep 2008 13:55:56 +0000

Another factor in option pricing that is often overlooked is the liquidity of the options themselves. Options that have low volume usually have very nasty bid/ask spreads that puts you at the mercy of the market maker.

In a high volatility environment the best way would be to do bear and bull vertical spreads and volatility does not matter as much as if you were doing for example a calendar spread.

By: Steve

Steve — Tue, 09 Sep 2008 23:54:12 +0000

But one would think that the positive effects of delta would be enough to outweigh the reduction of implied vol (vega) and the passing of time (theta)?

By: Siva

Siva — Sat, 05 Apr 2008 13:47:52 +0000

When IV is high and ig your expect it to come down, Credit spreads are better. If you are bearish, sell call spread (something like sell 60 call and buy 70 call, same month).

If you are bullish, sell put spread.

Neutral, do condor by selling both otm call spreads and put spreads.

Another way if neutral is to do ATM butterfly.

In all cases IV drop will halp a lot to the option position.

hope this helps.

By: Andy

Andy — Sat, 05 Apr 2008 02:04:25 +0000

Good advice. I have been reading about the alpha, beta’s and gammas as I try to learn about option trading and it all comes down to volatility and time value. Options are great tools to make real wealth or loose everything very fast. I am going to be writing about my experience to date in an upcoming post at – http://www.savingtoinvest.com – and will include a link back here.

By: Dax Desai

Dax Desai — Fri, 04 Apr 2008 20:20:41 +0000

Slug – I would not have bought calls because of the same volatility argument. Calls would have been expensive and as the volatility eventually dropped, the calls would have seen downward pressure. Now if the stock movement is enough, then you could still make money. I personally don’t like to be going uphill in my trades. I could have been completely wrong and the volatility could have stayed high in which case you would have made money on Wed.

By: Slug

Slug — Fri, 04 Apr 2008 18:11:12 +0000

Nice explanation. Would you have enhanced a trade on Mon/Tues with a short sell AND buying calls or would the call price have suffered due to the same volatility argument? I assume it would have.

By: Dax Desai

Dax Desai — Fri, 04 Apr 2008 05:42:21 +0000

Thanks. I’m glad it is useful. I will post a few more financial picks over the weekend.

By: Agung

Agung — Fri, 04 Apr 2008 05:38:54 +0000

Excellent post. I was wondering why I lose in options sometimes even when my stock does exactly what I expect it to. I will definitely do more education in options. Any other finance stocks ideas?