Author's Acknowledgement

Lately these posts have been rather "deep" or perhaps too advanced in their nature. I fully understand this and I own up to the consequences. I have a lot of future posts planned that will step back from things that might be over your head, going back to basic concepts that are commonly misunderstood or taken for granted. Keep checking back with me and I can promise you will eventually get something out of all this nonsense.

Hi Jeff, Had a request for a post. How about when we have made a determination for which option to buy, but how to buy it? When should we try to do better than splitting the bid and ask? What if we really want that option and enter our order the night before - should we give it a little extra room in case it takes off that day. Are there any cases where you buy market orders? Etc. It would be great to get some little tricks of actually placing orders, and getting good fills etc. as those things are usually not covered in classes. Thanks a million.

Jeff. I love your advanced postings on Greeks, Volatility, and the bare bones of real serious trading of options. Please continue to set the bar high.

Following up on what Scott wrote, I know you like to buy OTM options. Do you only do so when the I.V. is low and the Vega is high for the option?

Many thanks. Great stuff here! It's the stuff you seemingly can't get from investools.

Following up on Scott's question, what is the relationship between IV and vega? Let me see if I have this correct. Vega is the sensitivity of the option theoretical value to changes in volatilty. It just affects the time value portion of the option price - not the intrinsic values portion. If you have a low IV option, you want to go long with an option with high positive vega. If the IV is near its historical high, you would want to be selling the option with a high negative vega. I presume the magnitude of the vega changes as the option moves along the volatility smile from OTM to ATM and ITM. Comment?

Jeff H. Wash DC.

One word of caution regarding your analysis above: If you are selling an option with high vega, this can be very risky. The vega is high for a reason - there is expected to be a big price move, but you can't always determine which way the price will move. By selling a high vega option, you are increasing the odds that the price will move against you quickly. Delta will always be higher than vega, meaning price movement is king. Don't lose sight of that.

Mike,

But the whole idea was to be delta-neutral, wasn't it? Meaning the price can do whatever it wants and you remain even.Again, the example was high IV and expecting it to drop. You get into a delta neutral trade to eliminate the effect price movements will have.

Question for Jeff K. You said IV will eventually revert to it's historical mean. That is good info. How do you find it's historical mean. Do you just look at that chart and see where the average of the gold line is, or does it tell it in one of the columns?

In an article by Lawrence Connors, he discusses two traits associated with volatility. One , that it has the characteristic of being mean reverting and the other that volatility has strong autocorrelation. Once volatility reaches either is high or low historical levels it tend to reverse and head towards its mean. Once it has reversed, the tendency is for it to keep moving in that direction. When I was asking about selling high volatilty, I was inferring about a situation where the IV had been near its historical high and had started reverting to its mean.

These posts are extremely helpful to stimulate discussion.

Jeff H. Wash DC

Jeff,
Could you discuss a little more about delta neutral and how we find options that are delta neutral. I am confused on this issue.

Anu

Jeff K.

I'm with Anu. If you would go over the relationship between Vega_, Delta (+,-).

BTW Michael Drew has a very eye opening article over at incometrader.com. He writes the safety article. Shows a graph of the housing market in relationship to the S&P. 79% correlation and the S&P lags about a year behind. Very Very bearish.

Dave

Personally, I enjoy the advanced concepts. Keep up the good work!!

Jeff,
I have to admit feeling a little discouraged with comments about"lowest common denominator" and realizing that trading options seems out of reach for most investool students

In response to the comment that was marked "anonymous..."

Don't feel discouraged. Everyone posting here is an INVESTools student, and they have been a beginner at one point or another. As they look back, they recognize that there is a lot to learn on the topic, and most of the material provided was relatively basic.

I read a quote by George Lucas once..."You have to find something that you love enough to be able to take risks, jump over the hurdles and break through the brick walls that are always going to be placed in front of you. If you don't have that kind of feeling for what it is you are doing, you'll stop at the first giant hurdle."

If this feeling of discouragement is overcoming the drive to want to learn as much as possible and become successful at this, then perhaps the desire isn't totally there yet. In my opinion, I would say take a deep breath, open a few books, and hop on board with the rest of us. We all want to learn as much as possible so we can succeed in the market.

Jeff

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...I'M AN OPTION ADDICT...I'M AN OPTION ADDICT...I'M AN OPTION ADDICT... ...I'M AN OPTION ADDICT...I'M AN OPTION ADDICT...I'M AN OPTION ADDICT...

About me

  • I'm Option Addict
  • From Saratoga Springs, Utah, United States
  • I am a professional trader and an instructor for Investools. I've had relations with the markets for 9 years. Born in Concord, CA, but reside in Saratoga Springs, Utah. Father of THREE, Husband of one.
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