|Monitoring implied volatility is critical in long neutral delta trading.
Check the current volatility of the underlying asset regularly, and average the implied volatility of the options on both sides of the market to monitor for changes in the implied volatility for the option.
Your risk tolerance to decreasing volatility is a personal preference, but we typically recommend no more than 20 percent of the current underlying volatility.
For example, if current volatility is 40 percent on the underlying asset, then we would be looking at no more than an 8-point drop in implied volatility as a trigger for at least minimal rechecking of the probability calculation.
We also recommend placing a hard stop for the spread based on the theoretical value of the option spread at that price, depending on the risk tolerance of the investor.
The volatility computed using the actual market prices of an option contract and one of a ...
A back spread is essentially an inverted ratio spread.When constructing a back spread, you are selling ...
The magnitude of price (or yield) changes over a predefined period of time. The amount by ...
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