While customers are usually at a distinct disadvantage when Trading Options, there are situations in which they can even the playing field just a bit. As Traders, we pay substantial costs getting in and out and of trades due to commissions and the edge given up through the Bid/Ask Spread. However, if you are good at picking trades that have duration of a couple of weeks to months, using certain Options Contracts can help lessen that disadvantage.
If you are an Options Trading Novice, the terms Implied Volatility and Implied Volatility Skew may not have much meaning to you. You should enhance your knowledge by reviewing the Options Guide PDF which will clarify a lot of Options Trading Information for you. If you understand those concepts, they are a key to establishing Options Trading Positions which can improve your chances of making money substantially.
The examples shown below are for Soybeans and the E-mini S&P, however, the greater the Implied Volatility Skew, the better the opportunity for establishing a position which meets your risk/reward requirements. At Options Strategy Network our goal is to enable our clients to recognize Options Trading Strategies which can enhance their profitability. This is done through analyzing Historical and Implied Volatility, the Skew, Liquidity and finding the appropriate Strategy to meet your risk/reward requirements. Contact Us for private webinar training to meet these goals. Our lessons are designed for individual and corporate Clients.
An analysis of the Tables below shows just how much impact the Implied Volatility Skew can have on the relative value of Options Contracts. The first analysis is of Soybean Options for the July Contract. The Puts have an increasingly lower Implied Volatility the farther we get out of the money until finally the Skew increases at the farthest out-of-the money Put shown. On the Call Side however, the Implied Volatility increases the farther you get out-of-the money. It is this type of Options Structure that provides one with a directional opinion the opportunity to establish an Options Trading Position with an inherent edge. The second Table shows the reverse structure for the E-mini S&P Futures. It has a significant Put Skew and the Calls have a lower Implied Volatility the farther you get out-of-the money.
These types of Skews can help you design many different types of positions which provide an Implied Volatility advantage. This advantage takes time to work in your favor, but as the Black Scholes Model indicates, it should work in your advantage for the long run. The prices for the Options Trading Strategies below were taken early Friday morning; however, the Implied Volatility Skew in these markets is not likely to change anytime soon. The Options Trading Strategies below, both Fences, enable the trader with a Bullish opinion in the E-minis and a Bearish opinion in the Soybeans to establish positions with unlimited risk but excellent value. Take a look at the Tables below. Contact Us with any questions or for an individual Options Trading Webinar that should enhance your ability to find Options Trading Strategies to meet your needs.
Options trading involves significant risk and is not suitable for every investor. The information is obtained from sources believed to be reliable, but is in no way guaranteed. Past results are not indicative of future results.