Explore Your Options  |  JUN 2007

Explore Your Options by Tom Gentile

Stocks & Commodities V. 25:6 (35): Explore Your Options by Tom Gentile Got a question about options? Tom Gentile is the chief options strategist at Optionetics (www.optionetics.com), an education and publishing firm dedicated to teaching investors how to minimize their risk while maximizing profits using options. To submit a question, post it to our website at http://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C. DOES VOLATILITY MATTER FOR SHORT-TERM TRADES? I trade call options on a short-term basis. I typically hold positions from one to five days. The only factor I consider when trading call options is delta. I usually pick options with 30 to 60 days until expiration. My target delta is 0.75, but I will trade options with 0.65 to 0.85 deltas. For the most part the options I trade do follow the stock price closely, as prescribed by delta. My question concerns the option’s volatility. I do not consider volatility whatsoever when selecting the call option to trade. Am I doing myself an injustice by not paying attention to volatility? Does volatility matter when trading for the short term? Would I improve my chances for greater gain by considering volatility? If so, what should I look for? Thanks. —George Thanks for the question. As you know, several different factors can affect the value of an option contract. The most important is the price of the underlying asset. In your example, you are trading equity calls, and the price of the stock will be the single most important factor in determining the value of the call. If the stock price rises, the call will increase in value. If the stock price falls, the call will decrease in value.

by Tom Gentile