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A lot of option traders don’t fully understand Option Greeks. The inexperienced option trader only focuses on the Greek known as Delta. Although Delta can tell us a lot about our option position, the best traders don’t stop there. A good trader will focus on volatility in the stock market.

When adjusting the Delta of an option position to manage risk, it’s important to understand how to use volatility to adjust a position in their favor, sadly many traders don’t. There are different types of adjustments that can be done to not only adjust the Delta on the trade, but also adjust the position’s sensitivity to the implied volatility of the underlying asset.

Picture this; say you’re in an option spread called a Butterfly, and the stock market trends up to hit your adjustment point. What kind of adjustment should you make?

Always remember, when trading options, it’s important to follow the volatility chart along side the price chart.

For example, if the underlying is trending up, that probably means the volatility is going down (but not always the case). So, when making your adjustment, wouldn’t it be better if you put on an adjustment that can benefit from a falling volatility? This is called a Negative Vega Adjustment. Unless you want to prepare for a whipsaw move in the market, then you can always do an adjustment that adds positive Vega to your position.

You can learn some technical skills that can really have you make decisions on what type of adjustments need to be made. The ability to forecast both the price of the underlying and its implied volatility when you are studying the charts can be a big help.

When making adjustments to your option trades, it’s always a good idea to keep Vega in mind. Ignoring this can seriously put a damper on your potential for long term returns.

In conclusion, there are many ways one can neutralize the Delta position of their option spreads. Remember to analyze the volatility graph to decide the best Vega adjustment while comparing your adjustment possibilities. Check out videos and learn more about Delta and Vega at www.sjoptions.com

Now it’s your chance to learn the craft of Trading Options with Volatility. Get a good Options Mentor or you might not be trading in a few years from now.