John Mylant's  Instablog

If you do not understand the relationship between volatility and option prices, this will be a quick lesson and for those of you who already know, this will be a quick reminder.

As you know, when I trade, it is what I call "position" trading which mans I am more concerned about the position of the trade than I am the market direction. On the day and time I make the trade, I ask myself: "If the market moved against me for the rest of the week do I feel my position is safe?"

Asking this question has netted me a very nice 98.7% success ratio. And as time progresses I have learned a lot also. The greatest lesson I have learned through observation is how volatility impacts my trading.

When I first started trading, volatility was much higher than it was today. Back in the third and fourth quarter of 2010, the VXX volatility index was at 214 and I was regularly making (3% & 4%) trades each week.

I have seen a correlation between the dropping volatility rate and also the profits I can make trading options. As I have traded and recorded all my trades since 2010, I have watched the VXX drop from 214 down to its historic low of 37 where it presently sits.

(click to enlarge)

At the same time, I have also watched the % of profits I am able to find in my "safe zone" each week also shrink. Look at the chart of trades I made over a two year period. From 2010 when I was making 3% and 4% trades to the present quarter where I am mostly doing 1% trades.

I have not changed my strategy and position but prices have contracted with volatility. so I have learned that trading like I do-- my profits will be based on how volatility acts. As long as it stays low, my profits will consistently be at 1% until it goes up.

So what are my options?

I can do one of two things. I can either chase the money and attempt to make more money but also increase the risk, or I can trade where I am trading and focus on consistency instead of increased profits, and wait for them to come to me.

I have chosen the latter. I would prefer to keep my consistent success rate instead of chasing the money. I will always make a good profit this way and when volatility increase, I will make even better money.

So I have learned volatility influences what I can make where i chose to trade. But at the same time I chose to be consistently right and not chase the money to attempt to make a greater profit. When the markets are ready, they will give me a better profit.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.