Stock options trading systems bet on volatility, not just whether a stock will rise or fall. Complex positions like butterflies and iron condors can be successful but may generate high commission costs. A delta neutral approach bets on declining volatility, but fees and cyclical volatility can make it difficult. Another approach is to search for undervalued options, but it requires a lot of money and a long time frame.
A stock option trading system bets whether volatility will increase or decrease. To the casual observer, options appear to be bets on whether the stock will rise or fall, but are actually bets on whether the price will rise or fall faster than expected. In other words, call buyers are betting that stock prices will rise faster than what is built into the premium, while put buyers are betting that prices will fall faster than anticipated when the premium was set. .
All the slight variations in a stock options trading system produce a host of complex positions with names like butterflies, iron condors, and reverse butterflies. These complex positions are often an effort to make a pure volatility bet with no regard for direction. All these strategies can be successful if one does not have to pay commissions. It is quite easy for a complex position to generate commission costs so large that even if the underlying stock performs as expected, the trader loses money. If the underlying stock does not perform as expected, the trader loses even more money.
One of the buzz phrases of options trading is “delta neutral.” In options, that’s essentially the same as betting that volatility will decline. The theory goes that if a stock options trading system constantly rebalances its portfolios to remain delta-neutral, over time premiums will accrue in the account the system is trading, regardless of how the stocks traded move. underlie the options. There are two main problems with a delta neutral approach: fees and the somewhat cyclical nature of volatility. Betting that volatility will decline can be very difficult and expensive to sustain when volatility increases.
A final approach that a stock options trading system can use is to search deep down for money positions that are undervalued. Theoretically, incorrect pricing of out-of-the-money options is common for reasons that have to do with the mathematics of option pricing. The theory is that one will buy these options cheap, they will inevitably pay off in the long run when volatility increases enough to make them valuable. Capitalizing on option pricing requires an immense amount of money and a very long time frame. One can buy all the very high priced options in the market and not make a profit for years, as at least one large fund has.
Smart Asset.
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