Options Volatility: Conclusion
By John Summa, CTA, PhD, Founder of OptionsNerd.com
Trading options without an understanding of volatility is like operating on a patient without knowing what role blood flow plays in the human body. Unfortunately, too many traders launch into trading without the proper knowledge of volatility.
A misunderstanding of volatility's dynamics can lead to painful losses, which otherwise might not have been experienced. A proper understanding of volatility, on the other hand, can inject enhanced profit potential into strategies.
Toward this end, this tutorial has highlighted the following essential areas of volatility to provide a basis to explore the subject in greater depth later (see suggested resources below).
- Understanding the difference between historical and implied volatility
- Applying historical and implied volatility to pricing and valuation determination
- Getting a feel for how volatility impacts option strategies' potential risk and reward
- Acquiring insights into implied volatility skews
- Using options volatility to predict price moves
- Analyzing investor crowd psychology with options implied volatility (VIX)
To further develop you knowledge of volatility, check out "Option Volatility & Pricing: Advanced Trading Strategies and Techniques" by Sheldon Natenberg (second edition, 1994). Another recommended test is "Options As A Strategic Investment (fourth edition, 2002) by Lawrence Mcmillan. These two books should provide all the necessary concepts needed to fully understand volatility in all aspects of trading options.
Online sources of information include the Chicago Board Options Exchange website, where you can get intraday and end-of-day quotes for the VIX (implied volatility index) and other volatility indexes on major stock market averages. Additional volatility data is available at the CBOE website for individual stocks.
A derivative that confers the right, but not the obligation, ...
An options strategy that involves purchasing call options at ...
A group of individuals that are elected as, or elected to act ...
Crude oil is a naturally occurring, unrefined petroleum product ...
A leg is one component of a derivatives trading strategy, in ...
The issuance of an award, such as a stock option, to key employees ...
A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
After-hours trading (AHT) refers to the buying and selling of securities on major exchanges outside of specified regular ... Read Full Answer >>
With the growth in the size and number of hedge funds over the past decade, the interest in how these funds go about generating ... Read Full Answer >>
Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
The utilities sector exhibits a high degree of stability compared to the broader market. This makes it best-suited for buy-and-hold ... Read Full Answer >>