23 lines
1.6 KiB
Plaintext
23 lines
1.6 KiB
Plaintext
· GHAR:f ER :8'7 . . -
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How Volatility Affects
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Popular Strategies
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The previous chapter addressed the calculation or interpretation of implied volatili
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ty, and how to relate it to historic volatility. Another, related topic that is important is
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how implied volatility affects a specific option strategy. Simplistically, one might think
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that the effect of a change in implied volatility on an option position would be a sim
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ple matter to discern; but in reality, most traders don't have a complete grasp of the
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ways that volatility affects option positions. In some cases, especially option spreads
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or more complex positions, one may not have an intuitive "picture" of how his posi
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tion is going to be affected by a change in implied volatility. In this chapter, we'll
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attempt a relatively thorough review of how implied volatility changes affect most of
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the popular option strategies.
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There are ways to use computer analysis to "draw" a picture of this volatiiity
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effect, of course, and that will be discussed momentarily. But an option strategist
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should have some idea of the general changes that a position will undergo if implied
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volatility changes. Before getting into the individual strategies, it is important that
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one understands some of the basics of the effect of volatility on an option's price.
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VEGA
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Technically speaking, the term that one uses to quantify the impact of volatility
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changes on the price of an option is called the vega of the option. In this chapter, the
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references will be to vega, but the emphasis here is on practicality, so the descriptions
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