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Options Trading In Extremely Volatile Markets
The recent stock market crisis (2008) not only rocked the financial system and the worldeconomy but also the pockets of countless options traders all over the world. Optionstraders who used to profit in the years prior to this market crisis broke their bank as noneof their options strategies seem to work in this market anymore. So what is it aboutextremely volatile markets and how should one profit through options trading under suchconditions?Extremelyvolatilemarket conditions not only produce unpredictable short term stock  price swings but also open up the bid ask spread of individual stock options due to alower liquidity and profiteering bymarket makers. This combined effect not only made itdoubly hard for options traders to make a profit.Volatile options strategies, supposedlymeant for such conditions due to their ability to make a profit when the market moves upor down strongly and their ability to profit from an increase in volatility, also failed to produce any consistent profits due to the higher premium outlay and wide bid ask spreads, soaking up most of the profits. Unexpected rallies also crunch volatility to theextent of producing losses through decaying the premium of long legs at express speed.Short term (weekly, monthly) directionaloptions strategiesfared even worse as it notonly became almost impossible to predict short term price swings but the high premiumand bid ask spreads also took most, if not all, of the profits away even if the stock didmove in the expected direction.So what works in an extremely volatile market condition such as this one?First of all, let’s look at all the different ways to trade options. There are 3 main optionstrading methodologies; Swing Trading, Position Trading and Day Trading.Swing trading is a directional options trading methodology that aims to pick stocks thatwill move quickly and strongly within a short period of time in a predictable directionand then execute bullish or bearish options strategies in order to profit from these moves.As mentioned before, trying to profit from directional swing trading in an extremelyvolatile market is like swimming against the tide. Not only is directions hard to predict inthe first place but the high options premium along with gapping bid ask spread all work against its favor.Position trading is more complex than Swing Trading as it aims to profit mainly(although there are also position trading strategies that are directional in nature) fromvolatility or premium decay through putting together several different options and / or stocks in order to produce a hedged, market neutral position. Position trading has produced some pretty profitable results for me in this market crisis as volatility soaredand options premiums are high. This puts the disadvantages of an extremely volatilemarket condition in the favor of the options trader. Such positions include dynamicallyhedged delta-neutral as well as delta-gamma-neutralpositions. Both of these position trading strategies aim to neutralize market movement such that unexpected swings do notaffect the position significantly while the position safely takes the high options premium
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