Option Trading Course Stresses Greeks
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A lot of option traders don't fully understand Option Greeks. The inexperienced option trader only focuses on the Greek known as Delta. Although Delta can tell us a lot about our option position, the best traders don't stop there. A good trader will focus 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, since we are trading options, it's important to follow the volatility chart along with 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. Don't forget Vega! Always keep it in mind when making adjustments to your option trades. Ignore it, and you run the risk of damaging any potential for long-term returns. In conclusion, there are many ways one can neutralize the Delta position of their option spreads. Remember to analyze the volatility graph to decide the best Vega adjustment while comparing your adjustment possibilities. Check out videos and learn more about Delta and Vega at www.sjoptions.com