Option Strangle Magic » Volatility

Option Volatility & Pricing: Advanced Trading Strategies and Techniques [Kindle Edition]

admin — Sat, 19 Jun 2010 15:53:29 +0000

One of the most widely read books among active option traders around the world, Option Volatility & Pricing has been completely updated to reflect the most current developments and trends in option products and trading strategies. Featuring: Pricing models Volatility considerations Basic and advanced trading strategies Risk management techniques And more! Written in a clear, easy-to-understand fashion, Option Volatility & Pricing points out the key concepts essential to successful trading. Drawing on his experience as a professional trader, author Sheldon Natenberg examines both the theory and reality of option trading. He presents the foundations of option theory explaining how this theory can be used to identify and exploit trading opportunities. Option Volatility & Pricing teaches you to use a wide variety of trading strategies and shows you how to select the strategy that best fits your view of market conditions and individual risk tolerance. New s (more…)

Option Volatility & Pricing: Advanced Trading Strategies and Techniques [Hardcover]

admin — Wed, 16 Jun 2010 22:48:42 +0000

Commodity Options: Trading and Hedging Volatility in the World’s Most Lucrative Market (Hardcover)

admin — Fri, 08 Jan 2010 21:55:57 +0000

Don’t Miss out on Today’s Hottest Trading Arena: Commodity Options! “The authors have written the definitive work on trading commodity options. Their in-depth knowledge of this subject is legendary among industry professionals and expert traders alike, and their ability to relay their knowledge through text, pictures, and the spoken word is unparalleled in our industry.” –Lan Turner, CEO, Gecko Software, Inc. “This book captures the realities of commodity option trading in a simple and easy- to-read presentation that will be beneficial for traders of all sizes and skill levels.” –Chris Jarvis, CFA, CMT, Caprock Risk Management, LLC “Even the most experienced investors often overlook the fact that options on futures are fundamentally different from options on stocks. This book fills that gap and sets the record straight with clear and concise descriptions that are easy to understand. Guaranteed to become a true source of value creation for anyone interested in tradin (more…)

Trading Option Greeks: How Time, Volatility, and Other Pricing Factors Drive Profit (Hardcover)

admin — Tue, 05 Jan 2010 15:28:25 +0000

Review

“A must-read for individuals who are serious about trading options” — James Bittman, author, Trading Options as a Professional”Dan’s book is a primer for options aficionados. Without bogging you down with super-heavy math, he walks you through the key principles and shows you what matters the most to your trading portfolio.” — Fari Hamzei, founder, Hamzei Analytics, LLC

Review

“A must-read for individuals who are serious about trading options.”—James Bittman, author, “Trading Options as a Professional”“Dan’s book is a primer for options aficionados. Without bogging you downwith super-heavy math, he walks you through the key principles and shows youwhat matters the most to your trading portfolio.”—Fari Hamzei, founder, Hamzei Analytics, LLC

See all Editorial Reviews
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High Performance Options Trading: Option Volatility & Pricing Strategies with OptionVue CD (Hardcover)

admin — Wed, 30 Dec 2009 17:26:46 +0000

Experts are praising High Performance Options Trading From OptionVue™ Systems Len Yates “Finally! A book by fellow Boilermaker and option software guru Len Yates! This book is a must-read for anyone interested in a sensibly based, analytical approach to options tradingwhether youre a stock or a future options trader. And the story behind the creation of OptionVue™ is a fascinating bonus.” Larry McMillan, McMillan Analysis Corp. author of Profit with Options and McMillan on Options “An expert on volatility-based trading, Len Yates applies the same practical approach to this book as he has to his highly regarded software. This is not a technicians white paper, but a thorough, accessible guide that uses his real-life trading history to fully illustrate how you can succeed in the options markets.” Jim Bittman, Senior Instructor, CBOEs Options Institute author of Trading Index Options and Options for the Stock Investor (more…)

Options 3 CD – Advanced Concepts – Mastering Volatility (Interactive CD-Rom)

admin — Wed, 09 Dec 2009 16:19:41 +0000

In order to master options and profit by them as much as possible, you must learn how to to deal with Option Volatility But What is It? Mathematically, it is the square root of the variance. HUH? Sounds confusing, but don’t worry! Once you take this course, you will not only understand it, but you will routinely choose the best option trades for maximum profit.

Volatility in Options Trading is simply the most important aspect when calculating a high probability profit. Volatility can be used in explosive markets and be incredibly profitable in quiet times.

If you trade options, you need to “get” the spreads. In this course we outline their uses, abuses, risks and selection criteria in a simple, straightforward manner.

Learn the differences between Straddles and Strangles. Is a Long Butterfly better than a Short Condor? Perhaps you are not sure which way a stock price will go but expect it to move on earnings should you choose a Vertical Spread or a Calendar Spread (more…)

The Volatility Edge in Options Trading: New Technical Strategies for Investing in Unstable Markets (Hardcover)

admin — Thu, 03 Dec 2009 21:55:33 +0000

“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 & (more…)

How to Trade Options – Book Review – Lawrence G. McMillan, McMillan on Options

admin — Wed, 02 Dec 2009 23:09:02 +0000

Larry McMillan is an iconic Hercules of the options world. Few option titans have the depth and range of grounded insights to devote 630+ pages to a publication. Do not be overwhelmed by what initially appears as a titanic chronicle.McMillan commits extensive effort to clarify the proper use of misused trading terms. He rectifies inaccurate practices by applying the mechanics of the math that is material and helps you visualize this with graphically rich worked examples. Every chapter has its own summary, emphasizing specific techniques to refine your own trading methods.There are adequate reader reviews on Amazon and Google Book Search, to help you decide if you will get the book. For those who have just started or are about to read the book, I’ve summarized the core concepts in the larger and essential chapters to help you get through them quicker.The number on the right of the title of the chapter is the number of pages contained within that chapter. It is not the page number. The percentages represent how much each chapter makes up of the 630 pages in total, excluding appendices.1 Option History, Definitions, and Terms. 44, 6.98%.2 An Overview of Option Strategies. 60, 9.52%.3 The Versatile Option. 82, 13.02%.4 The Predictive Power of Options. 164, 26.03%.5 Trading Systems and Strategies. 90, 14.29%.6 Trading Volatility and Other Theoretical Approaches. 128, 20.32%.7 Other Important Considerations. 48, 7.62%.Focus on chapters 4, 5 and 6, which makes up about 61% of the book. These chapters are relevant for practical trading purposes. Here are the key points for these focus chapters, which I’m summarizing from a retail option trader’s perspective. 4 The Predictive Power of Options. Within this chapter, focus on these sections: Using Stock Option Volume as an Indicator, Implied Volatility Can Predict a Change of Trend and The Put–Call Ratio. Here, you are taught to spot trading opportunities where the daily total option volume is more than double the average option volume. For highly liquid Index products, a higher ratio is required. There are filters to validate the use of volume speculation. These filters include ruling out the impact of arbitrage, total volume concentrated in too few strikes that are not identifiable as block trades, spread trades concentrated in just two series of strikes and over concentration of daily volume in ITM strikes that does not have the percentage leverage of ATM/OTM strikes.The section on Implied Volatility evaluates the treatment of IV as it moves between its expected ranges towards extreme boundaries. IV Mean Reversion is involved. Implied Volatility must leave from where it is currently trading at (be it IV for ITM, ATM or OTM strikes), to converge at zero on expiration date. Though, price can go anywhere (up, down or stay flat). The boundary analysis of IV is applied to covered call writing, index options, the seasonality of volatility and trading volatility directly using the VIX. Other volatility companion measures should be used in combination with the VIX, namely the VXO, QQV and VXN as sentiment gauges.McMillan differentiates between a “standard” put-call ratio versus the “dollar-weighted” put-call ratio. There is further refinement on the applicability of specific ratios to equity only put-call ratios, distinct from index put-call ratios and futures put-call ratios. Weighted ratios accentuate the extremities of overbought/oversold conditions when sentiment has reached its peak or valley to signal impending changes, which is overlooked in using a standard ratio that is not weighted. Sentiment needs to be sensitized with the weightage.5 Trading Systems and Strategies. Pay attention to these sections, which make up about 68% of the chapter: Intermarket Spreads and Other Seasonal Tendencies. The section covers European options that do trade at a discount to parity, spread differentials between heating oil futures and unleaded gas futures, small-cap outperformance with the January effect, spread differentials between gold stocks versus the price of gold, spread differentials between oil stocks versus the price of oil, the relationship between the utilities sector and 30-year bonds, other relationships between sector indexes/futures and Pairs Trading. There is convergence and divergence at work in these specific products and asset classes identified. For a unique set of relationships, McMillan clearly explains why some relationships must be treated as cross-correlated dependencies versus independent treatment of non-correlated mutually exclusive events. There is also clarity on how to design your trading system to collectively control the diversification of risks across these distinct linear relationships and inverse interplays.The section on Other Seasonal Tendencies challenges August as a dull month with muted volatility in the pits, alerts you to September-October as months to be long puts but short futures and identifies cyclical periods of rallies in late October and late January. McMillan confronts the conventional reasons for seasonal nuances. For example, the traditional leave periods of floor traders/market makers/institutions who move 85+% of exchange volume does not dampen volatility in the pits and there is no slack during the Labour Day holiday period. He blends the business cycle in with the use of seasonality. For example, companies that are stock components of the S&P 500 with cash rich balance sheets will need to periodically slim down their current asset holdings and redeploy cash into longer-term investments. Firms must maximize shareholder’s equity and cannot just sit on cash. McMillan explains when and how to position your trades in view of the common market practice of “window dressing”, in context of cash flow contraction and the velocity of money during these periods of fiscal adjustments to the books of corporations.6 Trading Volatility and Other Theoretical Approaches. In brief, the themes covered are: volatility’s role in pricing options, controlling directional risk with delta neutral trading, predicting volatility based on forecasting IV from its current percentile, comparing historical and implied volatility to confirm trading ranges in percentile terms, trading implied volatility recognizing the trade off between being short premium versus long decay, reaffirming the relevance of the Black Scholes model with application of the Greeks, aligning a spread’s strike construction for trading the volatility skew, the aggressive calendar spread that expires within 10 days versus conventional inter-month calendars, using probability and statistics in volatility trading to rank the risk to reward profile of trades and expected return metrics to measure risk per $1 allocated.Of all the focus chapters, Chapter 6 is the heaviest on the use of numerical reasoning. Though, is not beyond anyone who is comfortable with Statistics 101.To complete the review, here’s the background of the author. Larry is the President of McMillan Analysis Corporation, founded in 1991. From 1982 to 1989, he headed up the Equity Arbitrage Department at Thomson McKinnon Securities, Inc. He traded the firm’s own money primarily in advanced option spreads and risk arbitrage strategies. Between 1989-90, he was in charge of the Proprietary Option Trading Department at Prudential-Bache Securities. He traded primarily convertible Euro-bonds and Japanese warrant arbitrage strategies. Prior to these roles, he was the retail option strategist at Thomson McKinnon from 1976 to 1980, and traded the firm’s proprietary account beginning in 1980. He initially worked at Bell Telephone Laboratories from 1972 to 1976. He holds an M.S. in applied mathematics and computer science.In conclusion, McMillan on Options exposes you to the full gamut of how to trade options and the essential methods required to build a sustainable and consistent trading system. Intermarket spreading and Implied Volatility forecasting are clearly the cornerstones of a solid trading system.This is not a criticism of the book but a personal observation. To complete the construction of a total trading system requires the metrics for portfolio diagnostics. I have written a separate article, entitled “Book Review - Kenneth L. Grant, Trading Risk” that deals with portfolio management.

Options Trading Strategies – Book Review – Sheldon Natenberg, Option Volatility and Pricing

admin — Mon, 30 Nov 2009 13:43:04 +0000

As with most books on the topic of how to trade options, the amount of material to get through can be daunting. For example, with Sheldon Natenberg’s Option Volatility & Pricing, it is about 418 pages to digest. There are adequate reader reviews on Amazon and Google Book Search, to help you decide if you will get the book. For those who have just started or are about to read the book, I’ve summarized the core concepts in the larger and essential chapters to help you get through them quicker.The number on the right of the title of the chapter is the number of pages contained within that chapter. It is not the page number. The percentages represent how much each chapter makes up of the 418 pages in total, excluding appendices.1 The Language of Options. 12, 2.87%.2 Elementary Strategies. 22, 5.26%.3 Introduction to Theoretical Pricing Models. 16, 3.83%.4 Volatility. 30, 7.18%.5 Using an Option’s Theoretical Value. 14, 3.35%.6 Option Values and Changing Market Conditions. 32, 7.66%.7 Introduction to Spreading. 10, 2.39%.8 Volatility Spreads. 36, 8.61%.9 Risk Considerations. 26, 6.22%.10 Bull and Bear Spreads. 14, 3.35%.11 Option Arbitrage. 28, 6.70%.12 Early Exercise of American Options. 16, 3.83%.13 Hedging with Options. 16, 3.83%.14 Volatility Revisited. 28, 6.70%.15 Stock Index Futures and Options. 30, 7.18%.16 Intermarket Spreading. 22, 5.26%.17 Position Analysis. 32, 7.66%.18 Models and the Real World. 34, 8.13%.Focus on chapters 4, 6, 8, 9, 11, 14, 15, 17 and 18, which makes up about 66% of the book. These chapters are relevant for practical trading purposes. Here are the key points for these focus chapters, which I’m summarizing from a retail option trader’s perspective.4 Volatility. Volatility as a measure of speed in context of price in/stability for a given product in a particular market. Despite its shortcomings, the definition of volatility still defaults to these assumptions of the Black-Scholes Model: 1. Price changes of a product remain random and cannot be engineered, making it impossible to predict price direction prior to its movement. 2. Percent changes in the product’s price are normally distributed. 3. As the product’s price percent changes are counted as continuously compounded, the product’s price on expiry will become lognormally distributed. 4. The lognormal distribution’s mean (mean reversion) is to be found in the product’s forward price.6 Option Values and Changing Market Conditions. Use of Delta in its 3 equivalent forms: Rate of Change, Hedge Ratio & Theoretical Equivalent of the Position. Treatment of Gamma as an option’s curvature to explain the opposite relationship of OTM/ITM strikes to the ATM strike having the highest Gamma. Dealing with the Theta-Gamma inverse relationship, as well as Theta being intertwined synthetically as long decay and short premium with Implied Volatility, as measured by Vega.8 Volatility Spreads. Emphasis is on the sensitivities of a Ratio Back Spread, Ratio Vertical Spread, Straddle/Strangle, Butterfly, Calendar, and Diagonal to Interest Rates, Dividends and the 4 Greeks with specific attention on the effects of Gamma and Vega.9 Risk Considerations. A sobering reminder to select spreads with the lowest aggregate risk spread versus the highest probability of profit. Aggregate Risk as measured in terms of Delta (Directional Risk), Gamma (Curvature Risk), Theta (Decay/Premium Risk) and Vega (Volatility Risk).11 Option Arbitrage. Synthetic positions are explained in terms of manufacturing an equivalent risk profile of the original spread, using a mix of single options, other spreads and the underlying product. Clear caution that transforming trades into Conversions, Reversals and Adjustments are not risk-free; but, may raise the trade’s nearer-term risks even though the longer-term net risk is lowered. There are material differences in the cash flows of being long options versus short options, arising from the Skew bias unique to a product and the interest rate built into Calls making them disparate against Puts.14 Volatility Revisited. Different expiry cycles between near-term versus longer-term options creates a longer-term volatility average, a mean volatility. When volatility rises above its mean, there is relative certainty that it will revert to its mean. Likewise, mean reversion is highly likely as volatility drops below its mean. Gyration around the mean is an identifiable characteristic. Discernible volatility traits make it essential to forecast volatility in 30 day periods: 30-60-90-120 days, give the typical term to be short credit spreads between 30-45 and long debit spreads between 90-120 days. Reconciling Implied Volatility as a measure of consensus volatility of all buyer/sellers for a given product, with inconsistencies in Historical Volatility and predictive constraints of Future Volatility.15 Stock Index Futures and Options. Effective use of Indexing to remove single stock risk. Distinct treatment of the risks for stock-settled Indexes (including impact of dividend/exercise) separate from cash-settled Indices (absent of dividend/exercise). Explains logic for Theoretically Pricing the options on Stock Index Futures, in addition to pricing the Futures contract itself, to determine which is economically viable to trade – the Futures contract itself or the options on the Futures.17 Position Analysis. A more robust method than just eye balling the Delta, Gamma, Vega and Theta of a position is to use the relevant Theoretical Pricing model (Bjerksund-Stensland, Black-Scholes, Binomial) to scenario test for changes in dates (daily/weekly) before expiration, % changes in Implied Volatility and price changes within and near +/- 1 Standard Deviation. These factors feeding the scenario tests, once graphed, reveal the relative ratios of Delta/Gamma/Vega/Theta risks in terms of their proportionality impacting the Theoretical Price of specific strikes making up the construction of a spread.18 Models and the Real World. Addresses the weaknesses of these core assumptions used in a traditional pricing model: 1. Markets are not frictionless: buying/selling an underlying contract has restrictions in terms of tax implications, limitation on funding and transaction costs. 2. Interest rates are variable, not constant over the option’s life. 3. Volatilty is variable, not constant over the options’ life. 4. Trading is not continous 24/7 – there are exchange holidays resulting in gaps in price changes. 5. Volatility is linked to Theoretical Price of the underlying contract, not independent of it. 6. Percentage of price changes in an underlying contract does not result in a lognormal distribution of underlying prices at distribution due to Skew & Kurtosis.To conclude, reading these chapters is not academic. Understanding techniques discussed in the chapters must enable you to answer the following key questions. In the total inventory of your trading account, if you are …