1. Option Volatility: Introduction
  2. Option Volatility: Why Is It Important?
  3. Option Volatility: Historical Volatility
  4. Options Volatility: Projected or Implied Volatility
  5. Options Volatility: Valuation
  6. Option Volatility: Strategies and Volatility
  7. Option Volatility: Vertical Skews and Horizontal Skews
  8. Option Volatility: Predicting Big Price Moves
  9. Option Volatility: Contrarian Indicator
  10. Options Volatility: Conclusion

By John Summa, CTA, PhD, Founder of OptionsNerd.com

Many beginning options traders never quite understand the serious implications that volatility can have for the options strategies they are considering.

Some of the blame for this lack of understanding can be put on the poorly written books on this topic, most of which offer options strategies boilerplate instead of any real insights into how markets actually work in relation to volatility. However, if you're ignoring volatility, you may only have yourself to blame for negative surprises.

In this tutorial, we'll show you how to incorporate the "what if" scenarios regarding changing volatility into your trading. Clearly, movements of the underlying price can work through Delta (the sensitivity of an option's price to changes in the underlying stock or futures contract) and impact the bottom line, but so can volatility changes. We'll also explore the option sensitivity Greek known as Vega, which can provide traders with a whole new world of potential opportunity.

Many traders, eager to get to the strategies that they believe will provide quick profits, look for an easy way to trade that does not involve too much thinking or research. But in fact, more thinking and less trading can often save a lot of unnecessary pain. That said, pain can also be a good motivator, if you know how to process the experiences productively. If you learn from your mistakes and losses, it can teach you how to win at the trading game.

This tutorial is a practical guide to understanding options volatility for the average option trader. This series provides all the essential elements for a solid understanding of both the risks and potential rewards related to option volatility that await the trader who is willing and able to put them to good use.
 


Option Volatility: Why Is It Important?
Related Articles
  1. Trading

    Stock Options: What's Price Got To Do With It?

    A thorough understanding of risk is essential in options trading. So is knowing the factors that affect option price.
  2. Trading

    How To Profit From Volatility

    We explain four key strategies to profit fom volatility in markets.
  3. Trading

    Implied Volatility: Buy Low and Sell High

    This value is an essential ingredient in the option pricing recipe.
  4. Trading

    The Anatomy of Options

    Find out how you can use the "Greeks" to guide your options trading strategy and help balance your portfolio.
  5. Trading

    Understanding Vega

    In options trading, vega represents the amount option prices are expected to change in response to a change in the underlying asset’s implied volatility.
  6. Trading

    The Forex Greeks And Strategies

    We look at the different kinds of Greeks and how they can improve your forex trading.
  7. Trading

    Understanding Option Pricing

    Take advantage of stock movements by getting to know these derivatives.
Frequently Asked Questions
  1. What are the different types of price discrimination and how are they used?

    Understand the difference between the three major types of price discrimination and how each is used in practical business ...
  2. How is profit maximized in a monopolistic market?

    Learn about monopolistic markets and how firms maximize their profits by solving for the quantity they must produce and the ...
  3. What profit margin is usual for a company in the retail sector?

    Find out the typical profit margin for a major retail company, and learn how it compares to the profit margins for other ...
  4. What Technical Indicators Back Up Doji Patterns?

    Learn important technical indicators that reinforce a doji candlestick pattern.
Trading Center