The Advantages of Option Spreads in a Heighted Volatility Environment
The start of the 2016 trading year has been a wild one. In what has been a dismal start to the year many traders have experienced outsized losses and are finding themselves with large losses already booked less than month into the New Year. Risk management is always important, but it takes on a special significance in volatile markets. Traders must to be extra diligent in their risk management during volatile times and need to make sure at all times that their exposure is appropriate for current conditions. With the number of trading days in January that have seen large intraday reversals a trader must make an effort to trade as risk efficiently as possible. One way that options traders can do this is by using options spreads rather than outright options.
Option spreads are a complex strategy that involves the buying and selling of two or more options contracts to create a different, and often more favorable, reward to risk profile. Option spreads also have different exposure to implied volatility than outright calls and puts do. It’s for these reasons that spreads can become more attractive in times of heightened implied volatility.
One of the main reasons for considering spreads over outrights are:
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