From Theory To Practice - September 7, 2021 - Forecasting Short-Term Option Prices

published 2 weeks ago by tastytrade, Inc.

In a market that's highly unpredictable, predicting anything is oftentimes a futile effort. Given the fact that market randomness consistently governs the day, it’s usually best to respond to market conditions, rather than try to predict market movements. Still, looking at three of the Option Greeks that we use every single day (Delta, Theta, and Vega), we can forecast where option prices are likely to go - should a stock move to a certain level in the coming days. With our XLE position, we do exactly that, in an effort to measure the realistic probability of our being able to exit the position anytime soon.

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