2 Distinct Concepts That Options Traders Need to Know

Posted On January 28, 2020 2:24 pm
By: Steve Smith

Market volatility is starting to tick back up as macro headlines from Iran/Iraq come in.

And now, we enter the think earnings season which not only will cause big moves in the individual names but over the past few years has proved to be a volatile first quarter. More specifically, on individual names that are about to report earnings we see implied volatility increase in anticipation of the event. But how does an increase in volatility, which basically is a measure of price change magnitude within a given time frame, impact options’ values?

To understand this, we need to turn to the Greek’s; Vega. Options traders sometimes use these terms interchangeably, and while they are related, they are two distinct concepts.

Volatility

Volatility is one of the five inputs used in the basic Black-Scholes options pricing model. Higher volatility means higher option prices. That’s because higher volatility means greater expected price swings.

So, it follows that… Continue reading at StockNews.com

Tagged with: options trading

About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.