Today we have a question about technical indicators. We’re looking at the option technical side.
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Is Implied Volatility Indicator Useful for Options Trading?
We’ve talked about the top two technical analysis indicators that I use. These are price and volume because a lot of that you can stem from those indicators.
From price and volume, you can get a lot of things, like moving average. If you don’t know what I’m talking about watch this video >>> Top 2 Technical Analysis Indicators
As we think about trading options, the reality is even when you trade options, you can get still the volatility idea of where things are based on how the stock has moved. Take a look at Apple.
For example, when a stock moves down very quickly, I know volatility is going to be higher. I don’t need to look at the volatility to get the inside of it.
When the stock is moving up (when we have a lot of bullish or Green Day’s), I know volatility will be lower.
The whole point of knowing when volatility is high or low (for example, understanding implied volatility), you don’t need to look at it as an indicator. You need to know what the number is.
When we look at the VIX and the whole point behind knowing where it is, is to know where you’re putting more risk.
It’s more advantageous from a volatility standpoint to put on things more like iron condors when the VIX is high – selling more option premium than buying.
When volatility is at lower levels, it’s safer from a volatility standpoint to put on things like calendars, double diagonals, basically more positive Vega trades. That’s because we know volatility has a higher chance of going up from there. And you can get burned on the volatility side.
This is the whole point of knowing and understanding the volatility of where you are. So when you look at this indicator, could you look at it as a trader?
Yeah, you could. Because now you look at it and you say as an option trader volatility is at a lower point or at lower levels. It’s probably better to do some positive Vega traits, calendars, double diagonals.
That kind of thing.
When volatility is at a higher level, it’s probably a good idea to do something with shorter Vega trades, which means iron condors and butterflies. But remember, even when the volatility is high, things can whip around very quickly. Sometimes you could get burned on the other side of the movement. All that the volatility does is make it on an iron Condor a wider range for you.
In these cases, when it’s super high, you’re almost good at being a value investor nibbling on some shares. Or if you’re in the option world, you could put out a much longer-term (let’s say diagonal spreads) in your investments long term account.
As far as an indicator goes, could you use it?
Yes, absolutely. It’s helpful because you know what type of risk trades you want to put on in terms of a volatility perspective.
But can you also get that from looking at the stock itself?
Yes, absolutely. When a stock is moving up very quickly, the volatility is going to be lower. When a stock is moving down very quickly, you know volatility is going to be higher.
When is it a good time to put on things like iron condors? Well, when you’ve had four or five down days.
When is it a good time to put on calendars or double diagonals? When you’ve had four or five up days because now the volatility should be at lower levels. And we know that volatility will go up from there.
If this was confusing, you need to learn a little more about the Greeks.
And then make sure you check out the courses that we have!
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