Nick Katiforis

The Trading Edge

Options offer something to traders that no other trading tool does — a “trading edge”. Employing option strategies at certain times can help to maximise your chances of success.

These include instituting option buying strategies when options are underpriced (low implied volatility) and option writing (selling) strategies when options are overpriced (high implied volatility).

Option prices reflect the sentiment of the underlying market. If the market anticipates that there may be extreme market moves ahead then the option prices will reflect this in the form of higher option premiums. If the market believes a flat, sideways market is more likely the option premiums will reflect a lower premium.

The option trader use these extremes in sentiment to institute buying or writing strategies in anticipation of prices returning to ‘normal’ levels over time.

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