In this article we’d like to explain adjustment beliefs which can be practical in running an options account. This individual strategy can be practical to each and every type of option spread such as the Credit Spread, Iron Butterflies, Iron Condors, Double Diagonals, as well as others.

As this is being written in October of 2008 the VIX is as high as it’s been. Look at a 5 year chart and see where we are. This level of volatility has made options quite expensive. Before we make any adjustments to our portfolios, we always think about the volatility. Where is it now and where is it going? Should we be buying or selling options at this moment?

A very common mistake that option traders make is buying or selling options at the wrong time. If we buy options when the volatility is at a high, we are entering a trade with odds against us. Option traders that do this don’t realize why their options lose value so fast. Every option trading adjustment should be made by thinking of the option Greeks and volatility. We really need to understand these fundamentals to succeed in the options market.

A STUDY IN TODAY’S OPTION MARKET

For instance, let’s say we are in an Iron Condor and the stock market is trending up near the short strike, and we are getting to the instant where we need to formulate an adjustment to supervise our possible danger. If this is the instance, subsequently the IV may possibly have dropped a small amount. We pull up the chart on volatility of the underlying, and we investigate the IV and see it is oversold and will soon rise again.

Ok, so now we have determined that the IV is on support, and we think it’s going to rise. Well, this means that the market might come back down also. So, do we do nothing at all? Well, that might not be such a good idea because our current position is at risk. So even though we forecast the market is coming back down, we still put some insurance on our trade. We have to avoid catastrophic losses if we want to be successful in the long run. So, in this case, we hedge our portfolio or position with a positive Vega strategy, one that will benefit from a rise in IV.

Some positive Vega strategies include Broken Wing Butterflies, Debit Spreads and Calendars. There are many more techniques which we discuss in our mentoring program.

In summary, prior to doing adjustments to your portfolio or option position, consider the volatility chart of your asset as well as the major markets. This will aid you to make better adjustment choices and reduce risk while maximizing your profits.