Option Trading Concepts to Help You Build a Solid Foundation

11. Assess the Market's Emotional Character

While a lot of attention is given to the news and to fundamental and technical factors, movement in the futures markets is really a reflection of traders' emotions.

Can anyone anticipate how the emotional swings affecting each market will unfold? Not with any consistency, in my opinion. That's why I often say, "Plan for the unexpected to avoid unpleasant surprises."

The best we can do is to recognize that when emotions heat up, eventually they'll cool down and when no one cares, they will soon heat up. That's what the "mean-reverting" tendency of implied volatility is all about.

In other words, delta neutral volatility trading comes down to assessing the "emotional character" of each market. To the extent you buy low implied volatility options in trending or choppy markets and sell high implied volatility options in markets that are moving sideways, your chances of making money will be greater than by merely guessing market direction.

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