tailieunhanh - PROFIT WITH OPTIONS CHAPTER 6

6 TRADING VOLATILITY. LEARNING OBJECTIVES: The material in this chapter helps you to: • Recognize volatility abnormalities and use them in profitable trading strategies. • Understand and use the measures of option price change (“greeks”). • Read and interpret price distributions. | 6 TRADING VOLATILITY Learning Objectives The material in this chapter helps you to Recognize volatility abnormalities and use them in profitable trading strategies. Understand and use the measures of option price change greeks . Read and interpret price distributions. Decide on the appropriate strategy when volatility is skewed either in the positive or the negative direction. Know when to use ratio spreads and backspreads. Volatility trading should appeal to more sophisticated derivatives traders because in theory trading volatility does not involve predicting the price or direction of movement of the underlying instrument. Instead it means essentially to first look at the pricing structure of the options at the implied volatility and then if abnormalities are identified to attempt to establish strategies that could profit if the options return to 179 180 TRADING VOLATILITY a more normal value. Simply put a volatility trader tries to either 1 find cheap options and buy them or 2 find expensive options and sell them. Typically a volatility trader establishes positions that are somewhat neutral initially so that profitability emphasis is on the option price structure rather than on the movement of the underlying stock. This chapter shows you how to use volatility to your advantage. NEUTRALITY This neutrality is usually identified by using the deltas of the options involved to create a delta neutral position. In practice any neutrality most likely disappears quickly and you are forced to make some decisions about your positions based on the movement of the underlying instrument anyway but at least it starts out as neutral. That may be true but you must understand one thing It is certain that you will have to predict something in order to profit for only market makers and arbitrageurs can construct totally risk-free positions that exceed the risk-free rate of return after commissions. Moreover even if a position is neutral initially it is likely that the passage of .