Jeff Augen, currently a private investor and writer, has spent more than a decade building a unique intellectual property portfolio of algorithms and software for technical analysis of derivatives prices. His work includes more than one million lines of computer code reflecting powerful new strategies for trading equity, index, and futures options. He is author of The Volatility Edge in Options Trading, The Option Trader’s Workbook, Trading Options at Expirations, Day Trading Options, and Bioinformatics in the Post-Genomic Era (Addison-Wesley, 2004). Much of his current work on options pricing is built on algorithms for predicting molecular structures that he developed as a graduate student. Read more about Jeff here; you may also want to read read my review of his earlier book “The Volatility Edge in Options Trading“.
OptionPundit: Jeff, It is a pleasure to have you with us.
Jeff Augen: Thank you.
OptionPundit: Jeff, is there a KEY MESSAGE you would like to share with the readers before we begin our discussion.
Jeff Aguen: Before 2007/08 financial crisis, markets were stable. Volatility was low, markets were rallying. There were hardly any “flash crashes” and terrorist attacks were the only major uncertainty. However, since 2008 market structures have changed. Government involvement, inter connectivity of global markets and evolution of HFTs all have now changed the way markets react to news. Individuals who limit themselves to using traditional off-the-shelf indicators will always lose money to sophisticated traders armed with more powerful tools. The days of buying and selling stocks when moving averages cross or an oscillator reaches one side of a channel are gone. Moreover, investors who fool themselves into believing that they can exploit combinations of these indicators are making a huge mistake. Times have changed.
Now program trading accounts for almost 80% of the trades. Super computers are being used and accordingly character of the trades has also changed. An example of how markets have changed is the intraday volatility; since 1990 S&P has experienced intraday High-Low transitions > 8% only 14times, 13 of which occurred in last 2 years. Today’s sophisticated investors tend to focus their attention on analysing subtle statistical distortions in volatility and identifying anomalies in derivative prices.
OptionPundit: Jeff, as market structure has changed, can the retail trader still trade profitably? What would he need to stay in the game?
Jeff Augen: The old way of using various indicators e.g. Momentum, stochastic, MACD is gone. He needs to realize that HFT’s /super computers will nullify any trends etc. by the time it is even visible to a trader on the charts. Retail trader need to understand the followings-
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