Today I want to share with you why volatility is an option sellers best friend.
If you’re brand new to trading options and you’re struggling with volatility or if you’re brand new to our channel, stay tuned.
I’m going to share with you some details about the options.
Before we start here are things you might want to take a look at:
- New Course: Understanding the Stock Market and How it Works (Version 2.0)
- New Book: Options Trading Strategies – Coming out Feb 24, 2020.
New Course – If you’re brand new to trading and investing, definitely check this course out. We’ve reworked it from the ground up for our original course.
New Book (Coming out Feb 24, 2020) – For those of you who are options traders we’re going to have a book that has risk profile pictures, how to set up the trade, how you profit, what happens with time, when that strategy works best and much more.
Learn more about Volatility
A lot of people don’t understand volatility. You can see today we have a down day. Today I’m recording this on January 7th. So it’ll be a couple of days before you watch it. But it gives you an idea of how the market is functioning.
Here we are with:
- the SPX down about 10
- the RUT down about 9
My positions overall, when you look at the Delta is positive. These positive Delta, which means I’m bullish on these positions. Meaning I look for them to go up in time. But my volatility overall is also positive.
And I’m still positive for the day even though most of these stocks and indexes are down. You can see it’s fluctuating here and there with the bid-ask spreads. But ultimately, you can see it’s more or less positive right there.
The reason for that is because of this volatility. When you look at this right here this Vega, this volatility is a good friend of mine.
It’s my best friend. That’s because when you’re looking at selling options and when you sell option premium, I want them to be at higher prices than over here.
Selling at higher prices
Remember when you’re selling it’s good for prices to be higher. If you’re a seller and you have a ton of cameras to your customers, it’s better to sell those cameras for $1,000 than for $700. That’s because you make more money.
The same thing here. When I’m a seller, if I’m selling options, I’d rather sell for something like $750 then $400. If you have an old guitar you want to sell, would you rather sell it for $400 or $750.
And that’s what we’re doing here. When we’re a net seller of the option premium, which is typically the type of trading that we do to make monthly income, we want those prices to be higher. And how did those prices become higher?
Well, it’s when volatility is higher.
Now, why does that work?
That’s because an option price is determined from the price kind of value of it.
Value + Time + Volatility
That volatility equation can play a huge role as you can see right here; it’s a big Greek for me. It’s 445 versus my Theta, which is my time decay. I’m only making about $113 a day on all these positions.
Whereas the Vega, if that volatility pops a little bit, it works out in my favor. And you can see right here these positions continue to fluctuate. Ultimately, selling at higher prices is what you want.
I’ve constructed positions that are more positive Vega. That means when volatility spikes up, I make money. Other times you can create positions where volatility contracts you make money.
The point being here is that it’s not about being positive or negative, Vega. It’s about knowing how to get volatility to work for you. And that’s why it can be a great friend for anybody who’s selling options.
You could have it work for you when volatility pops. Or you could have it work for you when volatility contracts. And you could almost be wrong on the direction.
You could see all my Delta, which means the direction of the stock is positive.
Take a look at SPX
I want it to go to the upside. But even though it did not, and it’s down today about 10 points, I’m still profitable for the day about $30-$40.
That’s because Vega is so big. That’s because I was on the right side of the volatility trade.
Take a look at Russell – RUT
Even with certain ones like a Russell, you can see I’m on the wrong side of the volatility trade. It may not hurt you too badly if you set up the trade in the right way.
Take a look at Netflix – NFLX
You could see here with a trade like Netflix has a bullish movement. Netflix today is down about almost $3. I’m looking for it to go up, but you can see that even though it was down about $3, you would think my Delta is positive.
Well, I’m still making money about $6 here on this trade. And that’s simply because of that volatility. So the long and short of it is that volatility you can make it work for you or against you.
It’s about knowing and understanding how volatility plays in the market. Volatility can be a great asset for an option trader. And that’s what I wanted to share with you today.
It’s an excellent market condition to show you this concept of how even when the price goes against, that when you have volatility set up to work for you (and it works in the right way), it can be positive to your account.
I hope you got some good thoughts and insights about this.
It’s tough to time it perfectly record the video and show the volatility side of things of how it can work out well.
Don’t forget about the new courses and books.
New Book: Options Trading Strategies – Coming out Feb 24, 2020.
Check out our other courses: