# Market volatility - strategy?



## theblip (17 August 2007)

Hi, 

I'm a bit of a newbie with derivatives. Don't think I will be good enough to attempt to trade them any time soon. But just always interesting to learn more about them...

Just wondering... Given the volatility of the current market, would most derivative traders be looking at a straddle strategy? I know there's probably more to it to chosing a strategy... but what are everyone's thoughts?


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## sails (17 August 2007)

theblip said:


> Hi,
> 
> I'm a bit of a newbie with derivatives. Don't think I will be good enough to attempt to trade them any time soon. But just always interesting to learn more about them...
> 
> Just wondering... Given the volatility of the current market, would most derivative traders be looking at a straddle strategy? I know there's probably more to it to chosing a strategy... but what are everyone's thoughts?




Not sure what type of derivatives you are referring to, but I'm assuming options / warrants as you have mentioned a straddle.  However, I'm aware that you can do straddle type strategies with CFD's and guaranteed stops, so what I have written below is relevant to options and warrants.

IV (implied volatility) is one of the most important components of option pricing to consider when chosing a strategy and even how that that strategy should be positioned.  IV levels often vary between option expiry months and also between strikes in the same month (often known as volatility smile or frown).

The option pricing calculator I use  give the option's sensitivity to vega.  As an example, if an option has a vega of 5, it means that for each 1% move in IV (up or down), that option will gain or lose 5 cents just because IV has changed - even if the underlying share has not moved.  And vega usually increases with further out in time options.

So, to buy an option, we really want to be sure that IV levels are more likely to increase.  If IVs are already high with a potential to start falling, then selling strategies are technically better, but then that brings directional risk.  When trading options (or warrants) we are not only trading direction, but IV  as well.

So, to answer your question with IV levels currently running at very high levels, no it's technically not a good time to be buying a straddle unless IV levels continue to rise.  And with IV levels so high, probability doesn't favour it continuing to rise.

Now a straddle entered 2-3 weeks ago would have yielded great profits, but that's hindsight!

This is a great time to see high IV in action - so suggest you paper trade to get a feel for what really happens in the derivatives market.

Hope this helps!


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