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Volatility Edge in Options Trading, The: New Technical Strategies for Investing in Unstable Markets

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Volatility Edge in Options Trading, The: New Technical Strategies for Investing in Unstable Markets

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Description

  • Copyright 2008
  • Dimensions: 6" x 9"
  • Edition: 1st
  • eBook (Watermarked)
  • ISBN-10: 0-13-278958-2
  • ISBN-13: 978-0-13-278958-5

 “Jeff’s analysis is unique, at least among academic derivatives textbooks. I would definitely use this material in my derivatives class, as I believe students would benefit from analyzing the many dimensions of Jeff’s trading strategies. I especially found the material on trading the earnings cycle and discussion of how to insure against price jumps at known events very worthwhile.”

DR. ROBERT JENNINGS, Professor of Finance, Indiana University Kelley School of Business

“This is not just another book about options trading. The author shares a plethora of knowledge based on 20 years of trading experience and study of the financial markets. Jeff explains the myriad of complexities about options in a manner that is insightful and easy to understand. Given the growth in the options and derivatives markets over the past five years, this book is required reading for any serious investor or anyone in the financial service industries.”

MICHAEL P. O’HARE, Head of Mergers & Acquisitions, Oppenheimer & Co. Inc.

“Those in the know will find this book to be an excellent resource and practical guide with exciting new insights into investing and hedging with options.”

JIM MEYER, Managing Director, Sasqua Field Capital Partners LLC

“Jeff has focused everything I knew about options pricing and more through a hyper-insightful lens! This book provides a unique and practical perspective about options trading that should be required reading for professional and individual investors.”

ARTHUR TISI, Founder and CEO, EXA Infosystems; private investor and options trader

In The Volatility Edge in Options Trading, leading options trader Jeff Augen introduces breakthrough strategies for identifying subtle price distortions that arise from changes in market volatility. Drawing on more than a decade of never-before-published research, Augen provides new analytical techniques that every experienced options trader can use to study historical price changes, mitigate risk, limit market exposure, and structure mathematically sound high-return options positions. Augen bridges the gap between pricing theory mathematics and market realities, covering topics addressed in no other options trading book. He introduces new ways to exploit the rising volatility that precedes earnings releases; trade the monthly options expiration cycle; leverage put:call price parity disruptions; understand weekend and month-end effects on bid-ask spreads; and use options on the CBOE Volatility Index (VIX) as a portfolio hedge. Unlike conventional guides, The Volatility Edge in Options Trading doesn’t rely on oversimplified positional analyses: it fully reflects ongoing changes in the prices of underlying securities, market volatility, and time decay. What’s more, Augen shows how to build your own customized analytical toolset using low-cost desktop software and data sources: tools that can transform his state-of-the-art strategies into practical buy/sell guidance.

An options investment strategy that reflects the markets’ fundamental mathematical properties

Presents strategies for achieving superior returns in widely diverse market conditions

Adaptive trading: how to dynamically manage option positions, and why you must

Includes precise, proven metrics and rules for adjusting complex positions

Effectively trading the earnings and expiration cycles

Leverage price distortions related to earnings and impending options expirations

Building a state-of-the-art analytical infrastructure

Use standard desktop software and data sources to build world-class decision-making tools

Sample Content

Table of Contents

Acknowledgments . . . xi

About the Author . . . xii

Preface . . . xiii

A Guide for Readers . . . xv

1. Introduction . . . 1

Price Discovery and Market Stability . . . 6

Practical Limitations of Technical Charting . . . 9

Background and Terms . . . 12

Securing a Technical Edge . . . 16

Endnote  . . . 21

2. Fundamentals of Option Pricing . . . 23

Random Walks and Brownian Motion . . . 25

The Black-Scholes Pricing Model . . . 29

The Greeks: Delta, Gamma, Vega, Theta, and Rho . . . 32

Binomial Trees: An Alternative Pricing Model  . . . 42

Summary . . . 45

Further Reading  . . . 45

Endnotes . . . 46

3. Volatility . . . 47

Volatility and Standard Deviation . . . 48

Calculating Historical Volatility . . . 50

Profiling Price Change Behavior . . . 61

Summary . . . 75

Further Reading . . . 76

4. General Considerations . . . 77

Bid-Ask Spreads . . . 79

Volatility Swings . . . 82

Put-Call Parity Violations  . . . 89

Liquidity . . . 91

Summary . . . 95

Further Reading  . . . 97

Endnotes . . . 97

5. Managing Basic Option Positions . . . 99

Single-Sided Put and Call Positions . . . 100

Straddles and Strangles . . . 118

Covered Calls and Puts  . . . 137

Synthetic Stock . . . 143

Summary . . . 146

Further Reading . . . 148

Endnotes . . . 149

6. Managing Complex Positions . . . 151

Calendar and Diagonal Spreads . . . 152

Ratios . . . 162

Ratios That Span Multiple Expiration Dates . . . 175

Complex Multipart Trades . . . 182

Hedging with the VIX . . . 195

Summary . . . 202

Further Reading . . . 203

Endnotes . . . 204

7. Trading the Earnings Cycle . . . 205

Exploiting Earnings-Associated Rising Volatility . . . 207

Exploiting Post-Earnings Implied Volatility Collapse . . . 216

Summary . . . 222

Endnote . . . 223

8. Trading the Expiration Cycle . . . 225

The Final Trading Day . . . 226

The Days Preceding Expiration . . . 237

Summary . . . 240

Further Reading . . . 242

Endnotes . . . 242

9. Building a Toolset . . . 243

Some Notes on Data Visualization Tools . . . 245

Database Infrastructure Overview . . . 248

Data Mining . . . 252

Statistical Analysis Facility . . . 258

Trade Modeling Facility . . . 264

Summary . . . 268

Endnotes . . . 269

Index . . . 271

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