Edge. “What’s edge?” you ask. Basically it’s like crack for option traders. It is what you just can’t resist! Experienced option traders trade when (an only when) they see edge. They just can’t help themselves.
It’s like this. None of us has a crystal ball. As much as many of you may like to think you know where a stock is going, you simply don’t. Face it. Trading is statistical. So what makes for a good trade? Having the odds are stacked in your favor. Edge. So we look for the fine details of the trade that indicate trader edge. Alas, these are the details that are tough to find!
Any hack trader can look at a chart of a stock, see it’s in a trend and jump on the band wagon (and half the time they will be wrong). But the traders who have the real potential to out-shine their peers go a step (or maybe a few steps) further and study option premiums and other market data to swoop in on the good trades and skip out on the traps.
Much of the edge in an option trade can be found by studying its volatility. Option volatility isn’t a predictor; it’s better. It helps indicate whether an option is cheap or expensive. This is truly useful information.
Want to maximize your trading performance? Learn to recognize (and trade on) edge.