Trading Stock Options? Evaluate a Multitude of Factors Including Historical and Implied Volatility

12/02/2015 8:00 am EST


Fred Oltarsh


For the benefit of all newcomers still learning about trading stock options, Fred Oltarsh, at Options Strategy Network, highlights essential information he feels should represent the initial part of any trade analysis, such as implied volatility, historical volatility, and skew.

In order to trade options successfully, one must have a system for analyzing trades. In today’s competitive markets, only those with a system are likely to make money. The idea of taking shots is not a method for long-term success. The following information is an initial part of any trade analysis. It should be followed by technical and fundamental analysis and thought about which trading strategies would provide the best opportunity to meet the goals of the trade.

Essential Information Includes:

  1. Historical Volatility
  1. Implied Volatility
  1. Comparison between Historical and Implied
  1. Skew
  1. Earnings dates or special news releases
  1. Implied Volatility for the last six months
  1. Market bias
  1. Options strategy to meet trading goal
  1. How to obtain the best value in liquid markets

If one can successfully analyze these trading factors on a trade-by-trade basis, they should significantly improve their profitability. The chart below shows a comparison of historical and implied volatility for some stocks from November 13, 2015. Again, that comparison is only one basis for making a trading decision. All of this information is typically available on most well known trading platforms.

Click to Enlarge

Options trading involves significant risk and is not suitable for every investor. The information is obtained from sources believed to be reliable, but is no way guaranteed. Past results are not indicative of future results.

By Fred Oltarsh, Proprietary Trader and Editor, Options Strategy Network

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