22 lines
1.6 KiB
Plaintext
22 lines
1.6 KiB
Plaintext
782 Part VI: Measuring and Trading Volatility
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volatility will be slightly harmful to the spread. However, since risk is limited in a
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backspread, such a decrease in implied volatility would not have catastrophic conse
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quences unless one had overcommitted his funds to one position.
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SUMMARY
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In general, one can always determine the exposure of his position to volatility by com
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puting the vega of this position. However, it is also useful for a strategist to have some
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general feeling for how implied volatility will affect his positions and strategies. Thus,
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this chapter was designed to point out the most common effects that changes .in
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implied volatility will have on the basic types of option strategies. Once one has a
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feeling for his exposure to volatility, he can then assess whether an adverse volatility
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movement is likely. For example, if an increase in implied volatility would be harm
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ful, and the strategist sees that current levels of implied volatility are quite low in
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comparison to historical norms, then perhaps he should remove or adjust the posi
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tion.
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Volatility and the price of the underlying are the two major components
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affecting profitability for most option positions. Time decay is only most pertinent
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as expiration approaches. Yet, many traders concentrate greatly on potential price
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movements of the underlying, often while ignoring what changes in implied volatil
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ity could do. That is a mistake, for the most knowledgeable option traders plan for
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volatility risk at all times. Understanding and handling that risk can have a positive
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effect on an option trader's profits. |