The Stealth Greek Of Options Trading: Vega
By: Chris Vermeulen & J.W. Jones
In my previous missives on the Greeks of the option world, we have spent most of our time focusing on Theta and Delta. In the real world of option trading, option prices are the subjects of three primal forces: price of the underlying, time to expiration, and implied volatility. Delta and theta address the first of these two primal forces. The third primal force, implied volatility, is by far the least known by newcomers to the option trading world. However, while it is usually not respected or even known by many new to trading options, it typically is the most frequently unrecognized force resulting in is the cause for significant trading capital deterioration.
In order to set the framework within which to understand option pricing, it is essential to understand that the quoted price of each option is in reality the sum of the intrinsic value (if any) and the extrinsic (time) value. The intrinsic value has been discussed previously and consists of the portion of the premium which reflects the extent to which the particular option is "in the money."
Understanding of the various concepts of volatility is essential to grasping one of the essential defining operational characteristics of the world of options. Volatility can be considered in light of:
1. What was (SV, statistical volatility; HV historical volatility; & other synonyms of the same)
2. What is,
3. What shall be (IV, implied volatility, and Market Implied Volatility (MIV) They are all confusingly disparate words and acronyms signifying identical concepts)
Of these three time frames within which volatility can be considered, implied volatility is by far the most important. The nexus point is right here, right now, while the future is unclear and will always be that way. For an option trader to sustain profitability over long periods of time, it is essential to understand implied volatility and its various implications.
Let us consider for a moment the variables defining an option's price. Intrinsic value is a crisply defined value that requires simply the calculation of the relationship of the price of the underlying to the strike price of the option and can theoretically vary from 0 to infinity. The time value (also termed the extrinsic value) of the option is dependent, in large part, on two distinct variables. These variables are the amount of time to expiration and implied volatility. Time to expiration is easily defined by anyone with access to a calendar and schedule of option expiration dates. Option expiration is easily accessible for option traders, and as such represents a totally transparent variable. Conversely, implied volatility is not as easy to explain, or quantify.
The subjective concept expressed by implied volatility is to be distinguished from the mathematically objective and precise concept of historic volatility. Historical volatility is simply derived from the price action of the underlying and can be calculated in one or more of several iterations. Each calculation is fundamentally derived from historically apparent price action.
Implied volatility is not only arduous to understand, it is even more difficult to quantify. A totally different calculation is required; the computation is reflective of a unique and characteristic point of view with regard to price action. It is technically calculated by an iterative process requiring multiple trial and error calculations; thankfully the robust computational ability of the current generation of computers handles this task easily. Of the three primal forces impacting option price, implied volatility is the only factor subject to cerebration. As an adaptable and subjective input factor, implied volatility is reflective of both general market sentiment and the subjective evaluation of potential future volatility while simultaneously corresponding with the specific direction of the underlying. As such, it is a forward looking evaluation as opposed to historic volatility which is well, historic.
Implied volatility has a historic and characteristic range for each underlying. A strong historic tendency is the characteristic for implied volatility to revert to the mean for the particular underlying under consideration. This strong mean reverting tendency forms one of the primary fundamental tenets of option trading and represents a major opportunity for potential profit in option trading.
TheOptionsGuide site produced the chart below that illustrates the behavior of Vega at various strike prices that are expiring in 3 months, 6 months and 9 months when the stock is currently trading at $50.
In addition to the historic backdrop in which implied volatility may be considered, there are certain stereotypic patterns of IV expansion and contraction in relation to anticipated events which may lead to unusual volatility of the underlying. Classic examples of these events include earnings, impending FDA announcements, and the release of key economic data by the government or the analyst community. For example, many of the most extreme increases in implied volatility anticipate FDA decisions and routinely revert to the mean immediately following the anticipated announcement. Potentially substantial profit opportunities are borne from such situations for the adept and knowledgeable option trader.
In future writings we will address the precise mechanisms by which perturbations in implied volatility can be exploited for profit by the knowledgeable option trader. Failure to consider the current position of implied volatility in a historic framework for the particular underlying in which you are contemplating a trade is the single most frequent hallmark of an inexperienced trader. Lack of attention to this important factor in trade planning is the most frequent cause of paradoxical option behavior and failure to profit from correctly predicting anticipated price movements of the underlying.
While most equity traders focus their attention on the SP-500 for broad market clues, option traders always have a watchful eye on the volatility index, commonly known as the VIX. While the VIX is the most common volatility measurement in the option trading world, there are several volatility indices which can be monitored, followed, and even traded if one is so inclined. While it is not always necessarily the case, recently when the VIX rises, the broad markets are selling off.
While this article has been a basic overview of implied volatility and Vega, it will conclude the series of recent articles which have been focused on the option Greeks. Forthcoming articles are going to be more focused on trades and the unbelievable profit opportunities that can be created by various option strategies. In closing, if you are interested in furthering your education regarding options my recommendation is to do some serious homework. Otherwise it will only be a matter of time before a combination of Theta, Delta, Vega, or implied volatility rear their ugly heads and take money from unsuspecting rookies.
If you would like to receive our free options trading reports and trading signals please join our free newsletter at: www.OptionsTradingSignals.com
J.W. Jones is an independent options trader using multiple forms of analysis to guide his option trading strategies. Jones has an extensive background in portfolio analysis and analytics as well as risk analysis. J.W. strives to reach traders that are missing opportunities trading options and commits to writing content which is not only educational, but entertaining as well. Regular readers will develop the knowledge and skills to trade options competently over time. Jones focuses on writing spreads in situations where risk is clearly defined and high potential returns can be realized.
About the Author
Chris Vermeulen is Founder of the popular trading site http://www.thegoldandoilguy.com. There he shares his highly successful, low-risk trading method. Since 2001 Chris has been a leader in teaching others to skillfully trade in gold, oil, and silver in both bull and bear markets. Subscribers to his service depend on Chris' uniquely consistent investment opportunities that carry exceptionally low risk and high return. Reach Chris at: Chris[at]theGoildAndOilGuy[dot]com
Does anyone kno a greek Myth that relats to the ocean?? Such as sea monsters?
IF u do here are some ?'s
1) What is the myth or sea monster??
2) Time frame the myth was popular?
3) What was the purpose of it?
4) Is the myth true or false? Give support.
The Odyssey was a sea myth. Sea monsters were Sirens, Scylla, and Charybdis to name a few. It also had the sea god Poseidon. It has been popular since it was written. They made a movie of it in the 90's, still popular. It was made by Hallmark Entertainment. It had actors, Armand Assante, Gretta Scacci, Bernadette Peters, Vanessa Williams and many others. The purpose was for the gods to show Odysseus that he would be punished for not having faith in the gods. However, in the end Odysseus proved to the gods that man was greater and didn't have to live as slaves to false gods.
 |
 Pampered Chef Hand Food Chopper Kitchen Gadget $15.02 (20 Bids) Time Remaining: 31m |
 New 8 Piece 18 8 Stainless Steel Cooking Utensil Set Kitchen Tool Gadgets Bonus $12.80 Time Remaining: 1h 33m Buy It Now for only: $14.20 |
 NEW Chop Sticks Each Misc Kitchen Gadgets 20641 085455206412 $9.49 Time Remaining: 1h 56m Buy It Now for only: $9.49 |
 VARIOUS KITCHEN GADGETS ETC ODD LOT 17 ITEMS $3.95 Time Remaining: 2h 53m Buy It Now for only: $5.25 |
 White Plastic Grip Kitchen Tool Apple Slicer Corer Gadget $5.00 Time Remaining: 3h 7m |
 JellyRivers Kitchen Gadget 12 Slotted Bamboo Spoon NEW $0.99 Time Remaining: 5h 18m |
 VINTAGE KITCHEN Knife Sharpening TOOL GADGET WOODEN HANDLE NICE $7.95 Time Remaining: 6h 20m Buy It Now for only: $12.50 |
 NEW Kitchen Utensils Pizza Cutter Ice Cream Scoop Peelers Knife 8pc Gadget set $18.00 Time Remaining: 6h 47m Buy It Now for only: $22.00 |
 Awesome Porcelain Blue Onion White Masher Wood Handle Kitchen Gadget $19.00 Time Remaining: 8h 18m |
 Kitchen Gadgets and Tools Deluxe Potato Cutter $44.99 Time Remaining: 8h 36m Buy It Now for only: $44.99 |
 41 PC KITCHEN UTENSIL SET knives cutting board gadgets $39.95 Time Remaining: 9h 31m Buy It Now for only: $39.95 |
 KITCHEN 51 Piece Cutlery AND GADGET SET $38.60 Time Remaining: 12h 20m |
 Lot Of 4 Vintage NEVCO Kitchen Gadgets Egg Topper Egg Rings Sandwich Flags $19.99 Time Remaining: 13h 44m Buy It Now for only: $19.99 |
 New Anchor Hocking 13 Piece Storage Bowl Set Bonus Kitchen Gadgets Free Ship $35.99 Time Remaining: 13h 49m Buy It Now for only: $35.99 |
 New Anchor Hocking 8 Piece Bakeware Set Bonus Kitchen Gadgets Free Ship $35.99 Time Remaining: 13h 49m Buy It Now for only: $35.99 |
 New Anchor Hocking 9 Piece Mix and Measure Set Including Kitchen Gadgets $62.99 Time Remaining: 13h 49m Buy It Now for only: $62.99 |
 New Rogers 44 Piece Cutlery Set and Kitchen Gadgets Super Fast Free Shipping $53.99 Time Remaining: 13h 51m Buy It Now for only: $53.99 |
 Egg Poacher Fry Pan Set Kitchen Tools Gadgets $23.99 Time Remaining: 14h 43m Buy It Now for only: $23.99 |
 Sunbeam Diet Scale Weigh Scale Kitchen Tool Gadget $8.99 Time Remaining: 15h 6m Buy It Now for only: $8.99 |
 NEW Tupperware Mini Kitchen Gadget Tea Strainer Sifter Blue $2.99 Time Remaining: 15h 37m Buy It Now for only: $2.99 |
 Unique Metal Folding Vegetable Steamer with Center Post Kitchen Gadget $15.79 Time Remaining: 17h 1m Buy It Now for only: $15.79 |
 Pastry Basting Brush Nylon Bristle Wood Handle New Kitchen Tools Gadgets $3.75 Time Remaining: 17h 20m Buy It Now for only: $3.75 |
 Cannoli Dessert Molds Forms Set of 4 Kitchen Tools Gadgets $7.98 Time Remaining: 17h 32m Buy It Now for only: $7.98 |
 Cheese Slicer Kitchen Tools Gadgets $3.99 Time Remaining: 18h 13m Buy It Now for only: $3.99 |
 Beatles Yellow Submarine Tea Sub Kitchen Gadget Gifts Designed Stylish silicone $0.01 Time Remaining: 18h 16m |
 Gifts Lifestyle Design Crime Scene Kitchen Gadgets hot pot trivet Silicone NEW $0.01 Time Remaining: 18h 16m |
 GIFTS ITALY Kitchen Tools New Cake Gadgets PALINUM SILICONE + BASE GLASS DISH $0.01 Time Remaining: 18h 16m |
 Cake Tester Probe Set of 4 Kitchen Tools Gadgets $4.99 Time Remaining: 18h 20m Buy It Now for only: $4.99 |
 1 Set 3 Silicone Food Basting Brushes Set of 3 Kitchen Tools Gadgets $8.99 Time Remaining: 18h 35m Buy It Now for only: $8.99 |
 Quality KIENZLE Kitchen Timer Germany Gadget $12.00 (1 Bid) Time Remaining: 18h 50m |
 Progressive Seafood Scissors Kitchen Gadget Utencil $7.99 Time Remaining: 19h 20m |
 Nut Mill 12oz by Farberware Kitchen Tools Gadgets $7.50 Time Remaining: 21h 20m Buy It Now for only: $7.50 |
 Pie Cake Divider Marker New Kitchen Tools Gadgets $12.99 Time Remaining: 21h 21m Buy It Now for only: $12.99 |
 NEW TALA MELON BALLER GADGET KITCHEN STAINLESS STEEL $4.72 Time Remaining: 21h 43m Buy It Now for only: $4.72 |
 Meat Baller Scoop 1 3 4 Stainless Steel New Kitchen Tools Gadgets $10.50 Time Remaining: 21h 53m Buy It Now for only: $10.50 |
 Jumbo Turner Red Kitchen Tools Gadgets $3.99 Time Remaining: 22h 3m Buy It Now for only: $3.99 |
 NEW Kitchen Apple Slicer Corer Gadget w Plastic Grip $5.00 Time Remaining: 22h 30m Buy It Now for only: $5.00 |
 Mini Forks Melamine Set of 2 Kitchen Tools Gadgets $4.99 Time Remaining: 22h 35m Buy It Now for only: $4.99 |
 Turner Red Kitchen Tools Gadgets $3.99 Time Remaining: 22h 47m Buy It Now for only: $3.99 |
 Long Turner Red Kitchen Tools Gadgets $3.99 Time Remaining: 22h 52m Buy It Now for only: $3.99 |
 Chef Craft Nylon Ladle Red Kitchen Tools Gadgets $3.99 Time Remaining: 22h 58m Buy It Now for only: $3.99 |
 3 BETTY CROCKER ESSENTIALS RED KITCHEN GADGETS NEW $4.95 Time Remaining: 23h 4m Buy It Now for only: $4.95 |
 Pastry Basting Brush Nylon Bristle BBQ Sauce Basting Kitchen Tools Gadgets $3.99 Time Remaining: 23h 18m Buy It Now for only: $3.99 |
 NEW Corn Holders Pack Misc Kitchen Gadgets 28381 719812283814 $16.30 Time Remaining: 23h 35m Buy It Now for only: $16.30 |
 NEW Melon Baller Pack Misc Kitchen Gadgets 39781 719812397818 $17.39 Time Remaining: 23h 36m Buy It Now for only: $17.39 |
 Set of 3 Long Graters Cheeses Peels or More Kitchen Gadgets $14.95 Time Remaining: 23h 36m Buy It Now for only: $14.95 |
 AUTOMATIC ROBOSTIR Cooking Kitchen TOOL GADGET AS SEEN ON TV $12.99 (2 Bids) Time Remaining: 23h 41m |
 Pop Up Turkey Timer 2 Piece Chicken Poultry Thermometer Kitchen Tools Gadgets $2.99 Time Remaining: 23h 45m Buy It Now for only: $2.99 |
 3 BETTY CROCKER ESSENTIALS RED KITCHEN GADGETS NEW $2.99 Time Remaining: 23h 45m |
 Old Potato Masher w Deer Antler Handle Kitchen Gadget $19.99 Time Remaining: 23h 47m Buy It Now for only: $19.99 |
 Cookie Dough Scoop 1 2oz Dropper Kitchen Tools Gadgets $5.99 Time Remaining: 1d 18m Buy It Now for only: $5.99 |
 Beer Can Vertical Poultry Chicken Roaster Grill Rack Kitchen Tools Gadgets $12.99 Time Remaining: 1d 24m Buy It Now for only: $12.99 |
 Bowl Scraper Pot Pan Dough Curved White Plastic Kitchen Tools Gadgets $4.99 Time Remaining: 1d 46m Buy It Now for only: $4.99 |
 Pastry Blender Blade Dough Blender Red Handle New Kitchen Tools Gadgets $14.88 Time Remaining: 1d 51m Buy It Now for only: $14.88 |
 NEW GARLIC PRO AS SEEN ON TV KITCHEN GADGET GIFT $10.99 Time Remaining: 1d 1h 5m Buy It Now for only: $10.99 |
 Spiral Vegetable Kitchen Gadgets Make Salad Slicer Peeler 3 Sets Of Blades New $45.99 Time Remaining: 1d 1h 33m Buy It Now for only: $45.99 |
 Tupperware Citrus Peeler Kitchen Gadget $1.99 Time Remaining: 1d 3h 19m Buy It Now for only: $1.99 |
 30 ITEMS Kitchen Gadgets Spoons Rolling Pin Spatula Wine Opener FREE SHIPPING $49.99 Time Remaining: 1d 4h 3m Buy It Now for only: $49.99 |
 New 48 Packs of Wood Tongs Wooden Kitchen Gadget $43.54 Time Remaining: 1d 5h 26m Buy It Now for only: $43.54 |
 New 144 Packs of Wood Tongs Wooden Kitchen Gadget $108.48 Time Remaining: 1d 5h 26m Buy It Now for only: $108.48 |
 |
OXO Good Grips Salad Spinner List Price: Sale Price: $28.95 You save: $1.04 (3%)  |
 |
Progressive GT-3520 International 19-Piece Measuring Cup and Spoon Set List Price: Sale Price: $6.99 You save: $2.96 (30%) |
 |
Microplane 40020 Classic Zester/Grater List Price: Sale Price: $7.99 You save: $4.96 (38%) |
 |
OXO Good Grips Multi-Purpose Pastry Scraper/Chopper List Price: Sale Price: $8.15 You save: $1.84 (18%) |
 |
Chef'n StemGem Strawberry Stem Remover List Price: Sale Price: $7.71 You save: $1.28 (14%) |
 |
Bear Paw Meat Handler Forks Sale Price: $9.95 |
 |
Simply Calphalon Nonstick 6-Piece Bakeware Set List Price: Sale Price: $24.99 You save: $5.00 (17%) |
 |
Swissmar Borner V-1001 V-Slicer Plus Mandoline 6 Piece Set List Price: Sale Price: $34.95 You save: $10.05 (22%) |
 |
OXO Good Grips Silicone Pastry Brush List Price: Sale Price: $5.49 You save: $2.50 (31%) |
 |
OXO Good Grips Swivel Peeler List Price: Sale Price: $5.95 You save: $3.04 (34%) |
Frame Greek
Thank You. We hope you found the
Frame Greek
you were looking for.