Volatility Edge in Options Trading
One complete book on Volatility!! What??? Yes, that was the reaction I had on my mind when I received an offer from Financial Times Press to review manuscript of an upcoming book “Volatility Edge in Options Trading” by Jeff Augen, Instructor, New York Institute of Finance. Since I have a insatiable desire to learn, I accepted the manuscript and decided to read, but that coincided with my month long holidays and therefore couldn’t write a blurb in time for the book. Well the book is now published and you may buy a copy from Amazon.
Let me begin my perspective that it was worth my time. It added value to my existing knowledge about IVs and specially reinforced my thoughts about stock pinning action. It’s not an easy book and therefore requires undivided attention. I couldn’t read and comprehend during my travel to places (my usual style of reading books) so I decided to read it during market hours, instead of looking at monitors, read the book and do simulations and back testing as well.
The book is categorized well and each chapter has a summary page. Don’t jump straight to the summary as I would recommend following authors thought process to get to the points.
The book covers fundamental about Options Pricing and elaborates a lot on volatility (Chapter 2 and 3) which may be a good refresher, but if you know it and “been there, done that”, you may want to skip those and go straight to Chapter 5 which is managing basic option positions. One thing I want to highlight, you do need to have an understanding about options, should know greeks and have fundamentals in place before taking full advantage of the concepts. Pls OP toolbox to find several tools that can help you get started. The same chapter, explains puts, calls, straddles and strangles, covered calls and puts, synthetics.
I suggest pausing after reading chapter-5. Give yourself a break for a day or two and just try to simulate the ideas that author has described in the chapter-5. Play around with the price changes, IVs, and if your broker’s platform allows then do becktesting on examples given in the book.
I liked Chapter 6, 7 and 8. I quickly glanced through chapter-9.
Chapter 6 talks about managing complex positions and covers 5 interesting areas 1) Calendar and Diagonal spreads, 2) Ratios, 3) Ratios that span multiple expiration dates, 4) Complex multipart trades and 5) Hedging with the VIX. There are a lot of examples and therefore you need to either have your computer with you or a paper pen to follow trade completely. You won’t find a lot of discussion on how to convert calendar into XYZ or diagonal into calendar etc. but it does give fairly good idea on how to play these. I liked”hedging with VIX” but I wish there were few more examples better even if the author would have given a portfolio and show how to hedge that with VIX in different conditions. Nevertheless, he has provided good grounding to understand VIX which can be supplemented with free resource on CBOE or in the OPToolbox.
Earning cycles are discussed in Chapter-7. Jeff has unfolded the price movements pre and post earning announcement and shared examples of strategies that can be implemented to benefit from this once in every three months event. This may be of importance to experience traders as earning cycle is about to begin (as of this writing). This is even more interesting for some stocks like GOOG, AAPL, BIDU, FSLR, SPWR which may offer great opportunities solely around earnings.
Stock pinning via expiration cycle is discussed in Chapter-8. I liked it. Jeff has very well explained, in simple terms, what are factors that may drive “inefficiency” and volatility on this day. I have been experimenting with Google for long time and has two successful wins. Check the first one here and second one here. Specifically he talks about:
- Rapidly accelerating time decay
- Large daily IV swings
- IV collapse on the final day
- Stock pinning caused by unwinding of complex positions and hedges
This is quite an interesting chapter that has potential to deliver good results provided readers have good understanding of concepts and did hands-on experience before diving with real money. This is once every month opportunity and returns (and so the loss) are significant. I would suggest reading it at the last (I think there is a reason why Jeff kept it last).
It’s an interesting book that I would like to add to my reading list and would recommend to those who have some background about Greeks and understand fundamentals of options trading. As a kind gesture, I have been offered 5 copies of the book that I am distributing to 5 OPN members who often contribute to learnings of others as well.
Profitable reading, OP