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Volatility Edge in Options Trading, The: New Technical Strategies for Investing in Unstable Markets
- By Jeff Augen
- Published Jan 17, 2008 by FT Press.
- Copyright 2008
- Dimensions: 6x9
- Pages: 304
- Edition: 1st
- Book
- ISBN-10: 0-13-235469-1
- ISBN-13: 978-0-13-235469-1
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Product Author Bios
JEFF AUGEN, currently a private investor and writer, has spent over a decade building a unique intellectual property portfolio of algorithms and software for technical analysis of derivatives prices. His work includes over one million lines of computer code refl ecting powerful new strategies for trading equity, index, and futures options. As co-founding executive of IBM’s Life Sciences Computing business, Augen defined a growth strategy resulting in $1.2B of new revenue and managed a large portfolio of venture capital investments. From 2002 to 2005, he was President and CEO of TurboWorx, Inc., a technical computing software company founded by the chairman of the Department of Computer Science at Yale University. He is author of Bioinformatics in the Post-Genomic Era: Genome, Transcriptome, Proteome, and Information-Based Medicine (Addison-Wesley, 2004).
“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
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106 of 107 people found the following review helpful
Excellent book for intermediates to advanced readers,
This review is from: The Volatility Edge in Options Trading: New Technical Strategies for Investing in Unstable Markets (Hardcover)
A friend of mine in the trading industry suggested I read this gem of a book ... within a single weekend I did just that ... and what a gem it is!Jeff Augen has put together a fine body of work in this book within which there are some seriously valuable nuggets of information. The volatility spike graphs are a novelty in this business that anyone studying and trading volatility should benefit from. Essentially what he's uncovering is "differential volatility", in other words whether the volatility is being caused by buyers or sellers. Typically, falling prices (due to selling action) will cause greater volatility, but not always. Sometimes the volatility is caused by rising prices. By understanding the direction in which the greater volatility of the underlying is occurring, the trader is able to position trades more appropriate to that skew. For example if the spikes indicate that volatility is caused by buying action then the calls may well be... Read more
41 of 43 people found the following review helpful
EZ Top %5 of all books on How to Trade Options., By
This review is from: The Volatility Edge in Options Trading: New Technical Strategies for Investing in Unstable Markets (Hardcover)
One of the few trading books that instructs the reader on when, where, why, and how to place an option trade that has an excellent statistical probability of success. His Standard Deviation Spike Graphs are useful in that they can help to identify (by scanning), and capitalize (complete trading plan)on profitable opportunities. There are many more useful bits of info. The author is a professional trader using the techniques he writes about; many of which I (20+ yr option student/vet) use, and can confirm that they work. He is also correct in stating that successful options trading is darn near a full time job. For new traders beware, his advice is geared towards bloodied experienced traders, so practice for a while. Micheal Jordan telling us his secrets on how he drove the lane against Jabbar, Worthy, and Rambus is useful but be careful during practice (a pull-up perimeter jumper might be lower risk at first). As always, any advice on trading without a complete trading plan will fail...
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37 of 40 people found the following review helpful
one of the best options books, By
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This review is from: The Volatility Edge in Options Trading: New Technical Strategies for Investing in Unstable Markets (Hardcover)
An excellent book, with some novel ideas and concepts not covered in other books on options. Specifically useful are the following discussions:- standard deviations and volatility charts - discussions of liquidity and volatility swings - hedging with VIX - trading the earnings cycle - trading the expiration cycle - excellent coverage of all the main options strategies and spreads Not a beginners book, and a year or two of decent options trading experience is recommended to get a good grasp of the concepts, but thats great as there too many beginners book out there, all mostly the same! |
Online Sample Chapter
Preface to The Volatility Edge in Options Trading
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
Errata
| PrintNumber | ErrorLocation | Error | Correction | DateAdded |
|---|---|---|---|---|
| 2 | p49 | The continuously compounded upward change is 61%, and the corresponding downward change is only –46%. | The continuously compounded upward change is 61%, and the corresponding downward change is only –41%. | 3/12/2008 |
| 2 | p63 | Table 3.4 Text should NOT be bold. 50.83 0.38 0.0075 51.08 0.25 0.0049 51.26 0.18 0.0035 |
fixed | 3/12/2008 |
| 2 | p117 | At the time of this writing, IBM stock traded for $99.00, and $70 strike price calls were trading for $30.10 (29 days left before expiration). | At the time of this writing, IBM stock traded for $99.00, and $70 strike price calls were trading for $29.10 (29 days left before expiration). | 3/12/2008 |
| 2 | p iv | update copyright page | done | 6/13/2008 |
| 2 | p67 | This effect is readily visualized in Figure 3.7, which contains 305 days of price change data for Apple Computer (AAPL). | This effect is readily visualized in Figure 3.7, which contains 310 days of price change data for Apple Computer (AAPL). | 9/11/2008 |
| 2 | p67 | Figure 3.7 Apple Computer price spikes (11/02/2005–01/12/2007) expressed in standard deviations. | Figure 3.7 Apple Computer price spikes (10/19/2005–01/12/2007) expressed in standard deviations(10 day window). | 9/11/2008 |
| 2 | p137 | Long calls are balanced against long stock, and short puts are balanced against short stock. | Short calls are balanced against long stock, and short puts are balanced against short stock. | 9/11/2008 |
| 2 | p171 | The first scenario—above the gray bar—loses 7%, and the second loses more than 21%. | The first scenario loses 7%, and the second loses more than 21%. | 9/11/2008 |
| 2 | p173 | We could capitalize on this characteristic of the market by taking the other side of the trade—long call/short stock or long stock/short put positions that are initially delta-neutral. | We could capitalize on this characteristic of the market by taking the other side of the trade—long call/short stock or long stock/long put positions that are initially delta-neutral. | 9/11/2008 |
| 2 | p185 | The short trade (above the gray bar) has very limited profit potential, and only one-third can be realized in the early downward spike depicted. | The short trade (above the gray bar) has very limited profit potential, and only two-thirds can be realized in the early downward spike depicted. | 9/11/2008 |
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