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Options Trading for the Institutional Investor: Managing Risk in Financial Institutions by Michael C. Thomsett

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4. Chart-Based Analysis

Options traders have traditionally timed entry and exit on the basis of implied volatility, the degree to which premium is above or below expected levels. A long position is opened when volatility is low, and a short position is opened when volatility is high. However, from a conservative perspective, this is a highly unreliable system because volatility changes rapidly and is not reliable. This is especially true during the last month of an option’s life, when volatility collapse negates the value of volatility analysis. Relying on technical analysis of the underlying security’s chart enables you to better time entry and exit.

An options trading program can be based on the combined use of fundamental analysis of companies ...

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