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This chapter is from the book

This chapter is from the book

Volatility

If the price of the underlying futures contract is fluctuating considerably, there is both a greater profit and a greater loss potential. Thus options tend to be more expensive to buy when volatility is high. Likewise, sellers will collect more premium for a short option during times of inflated volatility. Of course, premiums are high for a reason—the risk and reward are equally magnified.

Trading Volatility

Because of the effect volatility has on option premium, it is a good idea to buy options when the market is quiet and sell them in times of high volatility. Those holding long options during an explosion in volatility have been known to enjoy impressive profits. On the other hand, short option traders may find themselves in a less than desirable position should they be in a market that experiences significant increases in volatility after they have entered a position.

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