Intermediate Options Strategies

Options 101: A Myriad Of Strategies

The beauty of option volatility trading is its flexibility. 

The math does not change as you move from one asset class to another.  The market forces certainly change, but if you have a market that you want to trade, your option education goes right along with you, seamlessly. 

Let’s say you are the type of trader whose experience, capitalization and risk tolerance has allowed you to be comfortable and profitable as an option premium seller.  You identify stocks that have, in your opinion, rich implied vol when compared to the historical volatility and your own projection on future volatility. 

There are a number of option strategies that present themselves to you.  You can sell straddles.  This is high risk, high reward.  You can sell a strangle.  Depending on how wide your strangle is this can be far less risky (with far less reward) than a straddle sale strategy. 

But what if you had a trade signal set up that had options with a severe put skew?  Meaning the implied volatility of out of the money puts are greater than the calls?  In your opinion, just selling the put is the better play.  Why sell a call with cheap implied vols?  But, you don’t want to take a directional bet!  You can sell the underlying stock at a certain ratio to produce a risk profile that had the same properties as selling a strangle.  The ratio is called the delta and would produce a short vega position that is considered “delta neutral” (no directional bias.

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