Making Time and Volatility Your Partners in Trading Options
A great thing about writing (selling) call or put options is that they expire.
The price on an option depends on the volatility perception of the underlying index or stock, and he number of days left to its expiry.
Now, both the price and implied volatility of the option tend to decrease as the expiry date approaches nearer.
Normally, the drop in premiums happens faster after the 15-20th of the expiry month.
So, if you had bought an option you should not hold on to the position after the 15th day of the month.
By the same token, if you had written the option earlier than this day, your profits will rapidly increase on the option with the passing of time.
Because the premiums on options decay with time, you can see why it is always better to write options.
Time moves in your favour! Implied Volatility too, tends to decrease with time.
It is never a good idea to buy high volatility options, since this will eventually decrease and sometimes rapidly, which will result in sharper fall in the option price.
As a rule, high volatility options should be sold, since your sold positions have better chances of profits when it does decrease.
Similarly, low volatility options can be bought, if you can spot such an opportunity.
Most online brokerages provide a calculating tool for checking implied volatility, so make use of it and make volatility your ally.
Finally, stay on the right side of the market.
Here, just a peek at the daily chart of the stock or index over the past few weeks should suffice.
You do not need complex charts like ADX, Fibonacci, Stochastic analysis or Bollinger bands that use technical analysis.
Let the technical geeks handle these statistical analyses They are just that - statistics.
The market moves in a strange random way, and all you need to is let the market take you wherever it is going.
So just follow a simple chart that represents the present trend of the market.
I have found the Candlestick chart is a very easy to understand tool to clearly see market trends, and the special Heiken Ashi candlesticks charts are even better.
When you have friends like time, implied volatility and the trend on your side as your partners in trading options, you can sit back and enjoy the ups and downs of the market.
These friends help you the most when you are trading in index options.
I trade the NSE India Nifty options taking a simplistic view from the Nifty charting patterns, and I enjoy my trades.
The price on an option depends on the volatility perception of the underlying index or stock, and he number of days left to its expiry.
Now, both the price and implied volatility of the option tend to decrease as the expiry date approaches nearer.
Normally, the drop in premiums happens faster after the 15-20th of the expiry month.
So, if you had bought an option you should not hold on to the position after the 15th day of the month.
By the same token, if you had written the option earlier than this day, your profits will rapidly increase on the option with the passing of time.
Because the premiums on options decay with time, you can see why it is always better to write options.
Time moves in your favour! Implied Volatility too, tends to decrease with time.
It is never a good idea to buy high volatility options, since this will eventually decrease and sometimes rapidly, which will result in sharper fall in the option price.
As a rule, high volatility options should be sold, since your sold positions have better chances of profits when it does decrease.
Similarly, low volatility options can be bought, if you can spot such an opportunity.
Most online brokerages provide a calculating tool for checking implied volatility, so make use of it and make volatility your ally.
Finally, stay on the right side of the market.
Here, just a peek at the daily chart of the stock or index over the past few weeks should suffice.
You do not need complex charts like ADX, Fibonacci, Stochastic analysis or Bollinger bands that use technical analysis.
Let the technical geeks handle these statistical analyses They are just that - statistics.
The market moves in a strange random way, and all you need to is let the market take you wherever it is going.
So just follow a simple chart that represents the present trend of the market.
I have found the Candlestick chart is a very easy to understand tool to clearly see market trends, and the special Heiken Ashi candlesticks charts are even better.
When you have friends like time, implied volatility and the trend on your side as your partners in trading options, you can sit back and enjoy the ups and downs of the market.
These friends help you the most when you are trading in index options.
I trade the NSE India Nifty options taking a simplistic view from the Nifty charting patterns, and I enjoy my trades.
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