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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: 6x9
  • Pages: 304
  • Edition: 1st
  • Book
  • ISBN-10: 0-13-235469-1
  • ISBN-13: 978-0-13-235469-1

 “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

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

Updates

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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