The Mathematics of Options Trading [Hardcover]

C.B. Reehl (Author)

Book Description

Publication Date: February 3, 2005

The Mathematics of Options Trading shows options traders how to improve their overall trading performance by first understanding and harnessing options mathematics. This detailed manual introduces the math needed to understand options and how they work and provides step-by-step instructions on how to use that math to analyze intended trades before committing capital. Traders learn how to use moving averages, curve fitting, extreme values, skewness, and other techniques to augment trading profits. The valuable accompanying CD-ROM contains programs for analyzing opportunities using several strategies, creating spreadsheets, and more.

Editorial Reviews

From the Back Cover

Market-tested guidelines to understand the math and determine the profit potential of each option trade

Successful option trading requires that you understand and know how to use the mathematics underlying option prices. The Mathematics of Options Trading focuses on that math, providing you with the knowledge you need to both determine expected results of an option trade and calculate the optimum position size before committing capital.

Based on never-before-published work and research, this straightforward book includes:

• Clear-cut explanations of volatility and time to expiration--the two most important concepts for option traders
• Formulas and examples for calculating profit profiles of naked and covered options, combinations, spreads, synthetics, and more
• The Reehl Option Trader CD--with programs that immediately analyze profitable opportunities using numerous different strategies

The Mathematics of Option Trading explores dozens of formulas and techniques for analyzing option trades, as well as for understanding the odds of those trades, based on mathematical probabilities. It shows you how to work the numbers to take advantage of favorable opportunities as they present themselves, while at the same time making the necessary moves to reduce risk at every step.

Trading options is a meticulous and exacting undertaking that is fraught with risk. One way to achieve more consistent profitability is to gain a working knowledge of the mathematics and analyze the profit/loss profiles of each trade before putting your trading capital on the line.

The Mathematics of Options Trading focuses on the formulas and know-how you need to remove much of the guesswork from trading options. This in-depth trading manual provides you with the mathematical sophistication required for successful options trading, taking the mystery out of the math and making it both understandable and usable. Its comprehensive coverage includes:

• Formulas for developing profitable option strategies, including algebraic derivations, explanations and examples
• Basic combinations--covered calls and puts, protective puts, spreads, straddles, and strangles
• Strategy variations in which the number of options involved is important, including ratio spreads, backspreads, and butterfly spreads
• Calculation of mathematical expectation--the product of the value of an event and the probability of the event's occurrence
• Historical volatility--its calculation, use with the Black-Scholes option pricing model, sources for volatility information, and more
• The Greeks--Delta, Gamma, Vega, Theta, and Rho, with calculations and examples
• Other valuable concepts, including moving averages, first and second order equations, search algorithms, the put/call ratio, the central limit theorem, and more

Before you can be consistently successful as an option trader, you must first consider the possible outcomes together with their associated probabilities to always be aware of the odds of success. The Mathematics of Options Trading explains the mathematics required to achieve that goal, and how to dramatically improve the profit potential of trade selection.

The powerful accompanying CD includes:

• Expectation.exe--produces results for a single trade for any strategy covered in the book, both onscreen and on a printed report
• DailyCheck.exe--produces a printed report covering all example strategies for options on a given underlying instrument

About the Author

C. B. Reehl is an experienced options trader and former managing partner of a CPA and business consulting firm. Reehl has executive-level experience with Price Waterhouse & Co. (now PriceWaterhouseCoopers) and several other publicly traded and private companies. He has also written several articles on options trading for Futures magazine.

Product Details

• Hardcover: 416 pages
• Publisher: McGraw-Hill; 1 edition (February 3, 2005)
• Language: English
• ISBN-10: 0071445285
• ISBN-13: 978-0071445283
• Product Dimensions: 9.3 x 6.3 x 1.3 inches
• Shipping Weight: 1.6 pounds (View shipping rates and policies)
• Average Customer Review: 4.0 out of 5 stars  See all reviews (4 customer reviews)
• Amazon Best Sellers Rank: #1,045,136 in Books (See Top 100 in Books)

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Customer Reviews

Most Helpful Customer Reviews

19 of 22 people found the following review helpful:

2.0 out of 5 stars Badly misses its target, February 9, 2007

By 

Mikey "Mike" - See all my reviews

This review is from: The Mathematics of Options Trading (Hardcover)

This book fails on so many fronts that space simply wont allow to cover everything. First off, the author commits the crime of not knowing his audience. He assumes that you know nothing about options and very little about math. He then proceeds to bore you in early chapters with math that isn't even required later on. What's the point!? Its not until you get half way through the book that you finally get into the real meat. By then, he's makes a huge leap from reviewing how you add 1 + 1 to suddenly assuming that you know 1st year college calculus all in the matter of 1 chapter. In short, he tries to appeal to all, but misses the mark. I am an engineer, I know math, thats why picked up this book!!

Technically, I have many issues. First off, he more or less states that when selling naked puts you shouldn't worry about a move greater than 4 standard deviations because they never happen. Well my friend, although moves such as these do not occur frequently, they do occur often enough that I'd be concerned about using such a stratedgy. I have real life data from the past year to back up my claims. All the author has is theory. Go ask anyone holding a naked put in a pharmacutical company that just got shot down by the FDA what they think of a 4 SD move. They happen.

The author then states throughout the book that these are his claims for how the methods that he presents should work, but he then goes on to say that they should be tested before committing any real money. What the heck!? Why publish a book only to say that you should do your own research to prove his methods!?

I've been waiting for such a book for years! All the other options books out there miss the point of expected value. This book shines on that front. What's the point of winning 90% of your trades if you're a loser at the end of the day. That's the power of expected value. For years I've thought that if I could only come up with a way to accurately calculate expected values on options, then I could turn wall street into my own little casino and retire early! Well, its not that easy!

I've been doing my own research for the past year on all the formulas presented in this book. I've analyzed 1,000's of positions every month on spread sheets with easily downloadable data. Word of warning, dont bet your house on the expected values holding up. Distributions of returns vary from month to month and they also vary depending on the length of time involved. These distribution profiles vary enough to screw up expected values. Distribution profiles also vary greatly depending if you're looking at a large cap or micro cap stock. Do your own research as the author warns and you'll see for yourself. Its been a very frustrating process because in theory the math should work and I should be rich by now, but in practice it doesn't work so well. It just speaks volumes to how difficult it is to make money long term trading options.

I haven't given up the chase yet as I am continuing on with my research, testing and tweaking. This book should be credited for pushing me in the right direction, but its disappointing that the book falls short on its own real world exhaustive research.

8 of 8 people found the following review helpful:

5.0 out of 5 stars One of the Best, November 30, 2006

By 

Matt T (Sydney Australia) - See all my reviews

This review is from: The Mathematics of Options Trading (Hardcover)

One of the best books on options currently available. Many books when it comes to the mathematics side of options, become very complicated, this is not the case here. It is well set out and easy to understand. Would highly recommend it be the first choice for anyone who is interested in or already trades options and may want a better understanding of the fundamentals.

5 of 5 people found the following review helpful:

4.0 out of 5 stars Rather Unique, February 8, 2007

By 

Amit - See all my reviews

This review is from: The Mathematics of Options Trading (Hardcover)

If someone is looking for a basic understanding of the probalilistic nature of characterizing options behaviour without having sophisticated mathematical/statistical background this book almost uniquly provides that for you. Found the book's organization and clarity excellent with final set chapters bringing together all the lessons of early learnings very usefully expecially the calculations of the expected results for all common options strategies. One thing the reader needs to be aware of is that this book will not teach you how to trade options - there are much better books out there. After reading this book it will hopefully make you make a better decision on selection of the various options tools / strategies software in marketplace.