Why trading options is about trading volatility rather than betting on ups and downs

Because trading options is a different financial instrument than betting on the rise and fall, the main goal is to use the change in volatility to make a profit, not just to bet on the direction of the market.

Here are a few reasons why trading options is about trading volatility rather than betting on ups and downs:

Leverage: Options trading usually has a leverage effect, i.e., by paying a smaller cost, the investor can control a larger value of the underlying asset. This allows for greater flexibility and potential rewards in options trading.

In contrast, betting on the rise and fall of the market is usually a direct purchase and sale of the underlying asset, with no leverage.

Protection Strategies: Options trading can be used as a tool for portfolio protection. Investors can hedge their existing portfolio risk by purchasing options to prevent losses to their portfolio due to market fluctuations.

This protection strategy is different from simply betting on the rise and fall of the market because it is based on risk management of the portfolio as a whole.

Diversified strategies: Options trading provides a variety of strategies to choose from, such as call options, sell put options, combination strategies, etc. These strategies allow investors to utilize different combinations of options contracts to achieve specific investment objectives, depending on market expectations and risk appetite.

These strategies are designed based on the analysis of volatility and options**, rather than simply betting on market ups and downs.

Arbitrage opportunities: There are some arbitrage opportunities in the options market, that is, by trading multiple related options contracts at the same time, taking advantage of ** differences or arbitrage opportunities to obtain profits. This kind of arbitrage trading is based on an in-depth analysis of the options market and an understanding of the relationship, rather than simply betting on the rise and fall of the market.

To sum up, trading options is more concerned with changes in volatility and corresponding strategies, rather than simply betting on the direction of the market. Options trading is a more complex and diversified financial instrument that requires investors to have the relevant knowledge and skills to better understand and apply options trading strategies.

Because options do not necessarily have to be exercised to obtain income, but also through a simple liquidation of profits, the ** of the option is determined by the volatility, so when you ** an option, if the volatility increases, then the ** of the option will also rise, you can sell it for a profit.

As an option buyer, it is bullish volatility, and the probability of the underlying ** wave Zheng Tangerine moving is low；Basically, the buyer of an option is an idealist, paying a premium and waiting hopefully for the market to rise or fall sharply. If market volatility is expected to increase as expected, investors can pay proper attention to the strategy of long options volatility.

Typically, 50 ETF options use a long volatility strategy with three strategies to choose from:

(1) Buy straddle arbitrage

There are different options for buying straddle arbitrage, such as buying the current month, the next month, the near quarter, and the far quarter.

Judging from the combined Greek letters, the near-term straddle is certainly smaller than the long-term straddle vega, and the theta is also smaller, so it is theoretically better to buy the long-term straddle than to buy the near-term straddle.

If you are buying a wide straddle arbitrage, then in addition to the choice of different months, there are also different options for the strike price, such as: whether to interval the first, second, or third gear, different options have different pros and cons.

(2) Reverse arbitrage

The options for reverse arbitrage are also diverse, you can choose to do it with call options or put options; You can choose to use simultaneous options or calendar options; You can choose to do it in the form of expenses or you can choose to do it in the way of income.

Different combinations of Greek letters have different values, and the actual operation effect is also different.

(3) Calendar arbitrage

There are also many combinations of calendar arbitrage, which can be done horizontally or diagonally; You can buy the next month and sell the current month, or you can buy the far month and sell the current month or the next month; When the volatility surface is abnormal, you can also buy the near month and sell the far month.

Different combinations of Greek letters have different values, and the actual operation effect is also different.

There are at least 5 strike prices and 10 varieties of 50ETF options every month, and at least 40 varieties of options in 4 months, which can be arranged and combined to have hundreds or thousands of strategy combinations.

In these combinations, as long as the sum of the Greek letters vega is positive, we can be sure that the strategy combination is long volatility. Therefore, we can use our imagination to find the optimal strategy for long volatility through a variety of combinations.

We can adjust our options trading strategy based on the volatility of the 50ETF to optimize returns, and sometimes option buyers can also "dodge the long and short double kill"**.

One isGo long volatility, that is, the volatility is inRelatively lowtime,Call, or put.

One isShort volatility, that is, the volatility is inRelatively hightime,Sell to call, or sell put.

Of course, the direction has to be judged correctly, in the case of the right direction, combined with volatility**, as an option buyer, the contract ** of its position will rise very quickly, especially the virtual level becomes parity or even to the real value state, its increase is almost the largest.

If the direction is wrong, the loss of the contract** held by the option buyer will be slowed down somewhat.

So there are some more professional players who willAt low volatility, build a straddle strategy, that is, call + put.

When volatility is high, short volatility and build a sell straddle strategy, that is, sell call + sell put.

The volatility was maintained at a high level in the early stage, and the time value of at-the-money options was as high as seven or eight hundred, nearly 1,000 yuan, which is also unreasonable.

The buyer's market should pay attention to the losses caused by volatility** and be cautious about participating in out-of-the-money contracts. In the case of volatility**, it is recommended to open a position in real-value alarm contracts.

In options trading, volatility is one of the most important metrics for investors.

1. Sell options when volatility is high

When implied volatility is "too high", traders should sell volatility so that once volatility returns to normal levels, it can be converted into capital. At this time, the commonly used strategies are selling (wide) straddle combinations, etc.

Sell a straddle combination, i.e. sell one out-of-the-money call and one out-of-the-money put. If the underlying is close to execution at the expiration date, the straddle can be more profitable, but the wide straddle can be profitable in a wider range. In any case, when the volatility of the market returns to normal levels, i.e., the volatility level decreases, both strategies have a chance to make a profit.

2. Options when volatility is low

Contrary to selling volatility, when volatility is "too low" and the market returns to normal, volatility rises and strategists who want to trade volatility buy it. At this time, commonly used trading strategies include buy straddle combinations, reverse arbitrage, calendar arbitrage, etc.

The owner of a straddle portfolio can make a profit in two situations: one is that the implied volatility rises, and the other is that the underlying asset **** or ** reaches a certain range. The first case can lead the limb field to cause all straddle combinations** to rise, whether it is short-term or long-term.

However, if volatility stays at a low level, the profitability of the buy straddle strategy will depend on the movement of the underlying asset, and it will need to move until it reaches near the break-even point.

It is important to note that to determine whether an implied volatility is high or low, you cannot just look at the value of the implied volatility itself. An effective way is to compare the value of implied volatility with historical volatility, observe whether there is a good historical law, and seize the opportunity by judging whether the implied volatility deviates from the range of the historical law.

<> a large number of buyers of 50ETF options must have heard of such a word, this word is called selling and buying double kill, the meaning is also very simple and easy to understand, that is, when there are some special circumstances in the market, whether the option investor buys up or down, there will be losses at the same time, so options investors need to know how to accurately select 50ETF options?

When it comes to the question of how to accurately select 50ETF options, we can look at the problem from the perspective of some basic conditions for 50ETF options, so let's analyze and analyze how to accurately select 50ETF options?

Consider contractual factors.

The option contract of 50ETF options is a combination of existence, not a separate product, there are two very key parts, the first is the time value of the option, which must be known to everyone, then the other is the intrinsic value of the option, and this is a special data calculation, our ** 50ETF options have both values, so you must take into account the contract factors when choosing 50ETF options.

Consider volatility factors.

The concept of volatility should be known to those who have played ** options, because this data is a data that fully reflects the market, and even a large part of options investors will only look at this data directly when choosing options in the travel book, although it is not rigorous enough, but it is enough to show the importance of this data in the eyes of many people, the size of the volatility figure directly reflects the degree of market volatility, rather than the ** direction that some people refer to as a hail, which does not exist. At the same time, it should be emphasized that the size of volatility and the option premium are also very directly related.

Under normal circumstances, considering these two points is a means that a large number of options investors will implement, which is relatively simple and clear, but it must be noted that if you want to choose a suitable 50ETF option, you must consider more than the above two directions, and this is just two general directions.

1. The basic concept of volatility

Volatility is a measure of how much an asset** deviates from the mean, and the greater the deviation, the greater the volatility.

Volatility is a core variable influencing options** and has important applications in valuation and options investment strategies. From an intuitive point of view, the volatility of the underlying asset** can be understood as "the risk of the asset".

For example, a trade with a range of 80-120 must have a greater volatility than a trade with a range of 90-110.

Second, the characteristics of volatility

2. Mean reversion effect: If the average volatility is 20% and the recent volatility is 30%, there is reason to believe that the volatility will decline and move in the direction of the mean.

3. Momentum agglomeration effect: If things start to change in one direction, there is reason to believe that it will continue to change in that direction, and volatility has similar characteristics.

3. Classification of volatility

1. Historical volatility: ** or high-frequency tends to short-term historical volatility, such as 5-day, 10-day mid-term or long-term long-term historical volatility, such as 60-day, 80-day.

2. Implied volatility: It is the volatility derived from the B-S model.

3. Future volatility: Future volatility is often used when using the B-S model to calculate the theoretical value of options.

4. Volatility: refers to the value made by market traders on the future volatility.

Fourth, the use of implied volatility

1. Implied volatility is an indicator to measure whether an option** is "overvalued".

2. Implied volatility can predict the trend of the underlying **.

3. Abnormal changes in implied volatility often indicate the emergence of important events.

4. Generally speaking, the bull market band is accompanied by a decline in implied volatility, and the beginning of a bear market band is accompanied by a sharp rise in implied volatility.

5. Volatility Index

The Volatility Index is an important indicator of market sentiment and is globally recognized as an important tool for volatility management.

The Significance of the Volatility Index:

1. Reflect investor sentiment.

2. Measure the level of market risk.

3. Derivatives based on volatility index provide investors with a wide variety of investment and hedging tools.

6. Volatility trading

1. The core of the volatility directional trading strategy: find the difference between the implied volatility of the option and the actual volatility of the market, and trade it accordingly. Its strategies include: straddle strategy, strangler strategy, etc.

2. The core of the volatility arbitrage trading strategy: sell options contracts with overvalued implied volatility or undervalued implied volatility.

Volatility is usually defined as the standard deviation of the continuous compound interest yield, which is the percentage of the fluctuation of the price collector, which only reflects the magnitude of the fluctuation amplitude, without considering the direction of the change.

Implied volatility is the perception of actual volatility by investors in the options market when trading options, and this perception is reflected in the pricing process of options. Theoretically, it is not difficult to obtain the size of implied volatility. Since the option pricing ramp-up model gives a quantitative relationship between options** and five fundamental parameters (ST, X, R, T-T, and ).

As long as the first four basic parameters and the actual market ** of the option are substituted into the option pricing model as a known quantity, the only unknown quantity can be solved from it, and its magnitude is the implied volatility. Therefore, implied volatility can be understood as the expectation of actual market volatility.

The option pricing model requires the actual volatility of the underlying asset** over the life of the option. It is an unknown quantity relative to the current period, so it needs to be replaced by **volatility, which can generally be simply estimated as **volatility by historical volatility.

But a better way is to use a combination of quantitative and qualitative analysis, with historical volatility as the initial value, according to quantitative data and newly obtained actual data, constantly adjust and revise to determine the volatility.