Option Volatility
A good strategy to use when option volatility is low and starting to increase is the calendar spread.
This trade benefits when option volatility rises. To construct this trade you would purchase a longer dated option – one that expires several months out – and then sell an option – usually at the same strike price as the one you purchased – however the option that you sell should be a front month.
Option Volatility – Calendars
Traders should use this strategy on stocks or indexes that they expect to stay mostly range bound – unless they are placing it as a directional play – for example if they believe that the underlying they are trading will be making a significant move down.
Option Volatility – Profit Boost
If the trader believes that there is a significant downward move about to occur in the underlying – they could place a calendar spread lower then where the underlying is currently trading at. If the underlying does in fact move down quickly – it is quite likely that the option volatility is increase from the downward move – helping to boost the position into profit even more quickly.
Calendar spreads and double calendar spreads are great trades to use to take advantage of rising option volatility.
Option Volatility
Recently I was talking to a good friend who is also a little crazy like myself about option trading and in particular ‘selling’ options – and he was telling me about a technique he uses for deciding when to sell options by using and watching option volatility – helping him decide when to get into an option selling position.
Option Volatility – Watching the VIX
What he does is this: he opens up a chart of the VIX (the volatility index) and he applies some basic indicators that are usually used for charting stocks and/or indexes. These chart indicators include RSI and Bolinger bands – which again, he uses to watch option volatility.
Option Volatility – Using The ‘Bands’
When the charted VIX moves outside the bolinger bands – and especially when they move outside the bands in an extreme manner – he uses this opportunity to either sell options – for example SPY calls or puts in a spread (vertical spread, debit spread, credit spread) – or sometimes he will just place a spread trade on the VIX itself – knowing that the odds are increased that the VIX will return to it’s mean – and in the process of doing so it will either pump up or deplete the value in options – giving a great opportunity to sell options when the VIX has spiked up high outside of it’s bolinger band area.
Welcome to the option volatility dot net website. Here we will be taking a look at option volatility and how to use it to generate profits with option trading.