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Trading Options For Dummies, 2nd Edition by Joe Duarte

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Chapter 15

Letting Volatility Lead You to Trading Opportunities

In This Chapter

arrow Monitoring option volatility for prospects

arrow Trading implied volatility price skews

arrow Identifying the best strategies for current conditions

Although stock prices exhibit some cyclical properties, the cyclic nature of volatility is much more reliable for certain stocks. Even the market as a whole can display such tendencies, as seen by the CBOE Volatility Index (VIX), a measure of implied volatility of S & P 500 index options (see Chapter 5). And although stock traders hate volatility, options traders know how to make the most of it. This is especially true when it cycles and has a certain predictability to it, as it sometimes does. Thus, regularly monitoring volatility and using specific strategies to capitalize on relative changes in volatility levels, you can increase the odds of making profitable trades.

Ratio spreads and backspreads are strategies that also benefit from volatility changes. Incorporating delta-neutral concepts can then help improve strategy success. As your experience builds, you’ll develop more skill implementing approaches that are well suited to existing market conditions. ...

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