Limitations on capital. Stronger or weaker directional biases. Of course given the risks, which are frequently greater and more complex, options are not for everyone.
The Bottom Line There are seven factors or variables that determine the price of an option. Of these seven variables, six have known values, and there is no ambiguity about their input values into an option pricing model. But the seventh variable—volatility—is only an estimate, and for this reason, it is the most important factor in determining the price of an option. The current price of the underlying - known Strike price - known Type of option Call or Put - known Time to the expiration of the option - known Risk-free interest rate - known Dividends on the underlying - known Volatility - unknown Key Takeaways Options prices depend crucially on estimated future volatility of the underlying asset.
By sorting each strategy into buckets covering each potential combination of these three variables, you can create a handy reference guide. You could even print it out and tape it to your wall.
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As you review them, keep in mind that there are no guarantees with these strategies. A volatility vol spike is a reflection of heightened uncertainty 30 strategies for options typically price fluctuations.
Five Option Strategies for High-Volatility Markets Typically, high vol means higher options prices, which you can try to take advantage of with short premium strategies. High vol lets you find options strikes that are further out of the money OTMwhich may offer high probabilities of expiring worthless and potentially higher returns on capital.
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Pushing short options further OTM also means that strategies have more room for the stock price to move against them before they begin to lose money. Here are a few bullish, bearish, and neutral strategies designed for high-volatility scenarios. For illustrative purposes only. Bullish Strategy No.
But even though risk is defined, zero can be a long way down. See figure 1.
Those with an interest in this strategy could consider looking for OTM options that have a high probability of expiring worthless and high return on capital. Capital requirements are 30 strategies for options for high-priced stocks and lower for low-priced stocks. Your account size may determine whether you can do the trade or not.
Option buyers are charged an amount called a "premium" by the sellers for such a right. In contrast, option sellers option writers assume greater risk than the option buyers, which is why they demand this premium. Options are divided into "call" and "put" options.
In fact, some accounts require enough capital in the account to purchase the stock if the seller is assigned. See figure 2.
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Traders consider using this strategy when the capital requirement of the short put is too high for their account or if defined risk is preferred. RISK: Defined. See figure 3. Neutral Strategy No. See figure 4.
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Higher vol lets you find further OTM calls and puts that have a high probability of expiring worthless but with high premium. Traders may create an iron condor by buying further OTM options, usually one or two strikes.
Five Option Strategies for High-Volatility Trading Environments
You might not want to put this position on for a small credit no matter how high the probability, as transaction costs on four legs can eat into the profit potential.
See figure 5.
Max profit is achieved if the stock is at the short middle strike at expiration. Traders may place the short middle strike slightly OTM to get a slight directional bias. High volatility keeps value the of ATM butterflies lower.
Butterflies expand in value most rapidly as expiration approaches, so traders may look at options that expire in 14 to 21 days. Short gamma increases dramatically at expiration i.
Getting your feet wet
Consider taking profits—if available—ahead of expiration to avoid the butterfly turning into a loser from a last-minute price swing. NOTE: Butterflies have low risk but high reward. After all, volatility is related to uncertainty, and, where money is concerned, uncertainty can be unpleasant.