Let’s talk about the often misunderstood option Greeks. Beginning option traders only focus on the Greek known as Delta, and although Delta can tell us many things about our option position, there is more to look into. A good trader will focus a lot on volatility in the stock market.

When adjusting the Delta of an option position to manage risk, it’s important to understand how to use volatility to adjust a position in their favor, sadly many traders don’t. There are different types of adjustments that can be done to not only adjust the Delta on the trade, but also adjust the position’s sensitivity to the implied volatility of the underlying asset.

Let’s say you are in an option spread called a Butterfly, and the stock market trends up to hit your adjustment point. What should you do?

Well, since we are trading options, it’s important to follow the volatility chart along with the price chart.

Think of it this way, if the underlying is trending up, it usually means the volatility is going down, but not always. So when making your adjustment, try an adjustment that benefits from a falling volatility! It’s called a Negative Vega Adjustment, unless you want to prepare for a whipsaw move in the market, then you should do an adjustment that adds positive Vega to your position.

To help make decisions on what type of adjustments you want to make, learn some technical analysis skills. They can be really helpful! Learn to forecast both the price of the underlying and its implied volatility when you are studying the charts.

When making adjustments to your option trades, it’s always a good idea to keep Vega in mind. Ignoring this can seriously put a damper on your potential for long term returns.

To conclude, there are several ways to neutralize the Delta position of your option spreads. Always remember, when comparing your adjustment possibilities, analyze the volatility graph to choose the best Vega adjustment at the same time. Videos on this topic and others can be seen at www.sjoptions.com

There are many Option Courses on the market today, but there are not many that teach Trading Options with Volatility.

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