Options Volatility Trading: Strategies for Profiting from Market Swings**Overall Summary**
I use options in my trading and investing. However, I am not a sophisticated options trader who rebalances his delta hedge on an hourly or daily basis. Instead, I tend to use options to profit from the view I have of the markets or a stock.
As part of my on-going learning, I do read about options on websites, newspapers, and blogs. I read about options traders taking advantage of gamma, and, although I had a sense of what they were doing, I was never clear. After reading Adam Warner's book "Options Volatility Trading," I have a solid understanding.
I thoroughly enjoyed this book because it was like having a conversation with Adam, where he gave me a tutorial on how he thinks about options and how he trades them. He could easily have used complex mathematics, charts and diagrams, overly complex strategies to confuse most readers. Instead, he chose a conversational tone with sufficient material that most options readers would readily understand.
If you are brand new to options, this book might not be the proper entry point for you. Instead, you might wish to view the learning tutorials covered by Options News Network, an online site dedicated to, surprise, options.
If, however, you have a reasonable understanding of options, then you will find this book invaluable. By reasonable understanding of options, you know what a put and a call are and can describe them. Moreover, you have a rough idea of the Greeks, though Warner does provide a quick snapshot of the Greeks in his book. You don't require a strong or thorough understanding, just a reasonable understanding, to benefit from reading this book.
As fair warning, I did read some sections slowly and more than once. However, when I learn new material, I often read sections slowly and more than once. I learn better using this technique.
After reading Warner's book, I am much more comfortable in reading options articles. For example, when authors talk about the VIX, I am knowledgeable about the VIX, how it works, how to interpret it, and its shortcomings. I have a better appreciation of which options strategies to employ when.
Now that I have read this book, do I plan to become an aggressive options trader? I do not think so. Will I use strategies discussed in this book to enhance my returns? Yes, absolutely.
Is this book a worthwhile investment? Yes, most definitely. Even if the only benefit you derive is being able to understand options articles better than you did before, the book is a worthwhile investment. My knowledge is much stronger than it was before. And, I know that will profit from the knowledge and strategies discussed in the book.
I highly recommend "Options Volatility Trading: Strategies For Profiting From Market Swings" -- 5 stars.
**Introduction**
Adam Warner sets out the tone of the book where he explains that he will focus on volatility and the VIX. You will learn how to measure volatility or how to manage an active account or an investment portfolio with an ever-changing set of backdrop conditions.
**Chapter 1: Who Am I? Why Am I Here?**
From August 1988 until the 2000 timeframe, Warner worked at a Market Maker on the floor of the Amex Options Exchange. He describes his experiences and how the Amex changed during his tenure. My most important take-away is that Warner had to think quickly on his feet. Thus, through his experiences, he not only understood the technical aspects, but also gained an intuitive feel. I like that the author has achieved a wealth of knowledge and confidence.
**Chapter 2: Know Your Greeks**
Warner provides a quick high-level tutorial on the options Greeks. If you are looking for a thorough, rigorous text discussing the intricacies of the Greeks, then you'll need to consult other texts. His purpose in this chapter is to ensure that you have sufficient knowledge to understand the rest of the text.
As part of his quick overview, he teaches you how to think about your position sizing by using delta. That is, convert your option exposure through delta into a stock position. Given your portfolio, is your option size reasonable? While options can employ leverage to positive effect, they can, if you are not careful or have a string of poor luck, destroy your portfolio. So he cautions readers to ensure that their positions are not outsized for their portfolios.
Here's a mental model that helped me:
- Delta - Useful for sizing and judging risk exposure.
- Theta - The slope on a hill while driving or biking. Either its a positive force driving forward or it is a negative force that you need to overcome through trading.
- Gamma - Represents the energy or power. If I have lots of gamma at my disposal, I can more readily overcome theta.
**Chapter 3: Understanding the VIX**
Warner provides a high level overview of the VIX. As part of his overview, he instructs you on how you should view and make sense of iVolatility.com historical and implied volatilities. He also provides some historical contexts and provides some quirks with the VIX.
**Chapter 4: Nuts and Bolts VIX**
This chapter picks up from the last and provides more detail. Warner teaches you how to interpret the VIX in that it provides an expectation, not a guarantee of future price movement. Moreover, market volatility expectations are formed from the volatility of individual stocks and their correlation.
**Chapter 5: Volatility Timing**
Not all days are created and not all months are created equal. Warner uses historical analysis to help guide you when it is usually better to buy and sell options.
**Chapter 6: How Do Traders Trade Volatility**
In general, net selling options at a higher volatility and net buying options at a lower volatility than they ultimately realize is profitable. However, active trading is often required. Warner discusses how often you should rebalance your delta hedge among other considerations.
Because of my style of trading options is so much different from Warner's volatility style, I found this chapter particularly rewarding and helpful.
**Chapter 7: Options and the Quarterly Earnings Report**
Often you hear analysts say, "Stock ABCD is expected to move X%, either up or down, after the bell when it releases its earnings."
This chapter teaches you how you can determine for yourself how much the stock is expected to move. This knowledge is helpful whether you are an option or stock trader. If your expectations are different from that of the market, you can play accordingly. But, as Warner mentions, you have to be prepared to defend your position and take your medicine when the markets surprise you.
**Chapter 8: Like the Weather--The Trader VIX and Why It Doesn't Do What You Think It Does**
For those that don't understand them well, VIX, VIX futures, VIX Options on Futures, and VIX ETNs are complex and confusing. After reading this chapter, I have a clear understanding of how these instruments work. Consequently, I will take Warner's advice not to use them. Instead, as he suggests, I will keep it simple by using a different set of common indexes and ETFs.
With all the discussion in the media about VIX and fear index and how people might want to protect themselves against volatility, investors and traders should understand VIX. I suspect a surprising number do not.
**Chapter 9: Ratio, Ratio**
Put call ratios should be interpreted and used with caution, especially for individual stocks. By themselves, they could indicate any number of scenarios, and for you the trader, it is often difficult, if not impossible, to understand which scenario is at play.
**Chapter 10: We're (Pin) Jammin'**
Warner discusses the circumstances that make pins more likely. A pin is where a stock expires at a strike price. If you knew in advance where a stock would be pinned, then you could profit from this knowledge.
**Chapter 11: Myth-Busting and Other Assorted Options- and Expiration-Related Stats**
There are several urban legends related options and options expiry. Warner examines a few of them and provides you with his analysis. For example, we often hear that expiration week is more volatile? Is that true, and if so, how can you profit from it?
**Chapter 12: Buy-Write--You Bet**
I found this chapter surprising because the results were exactly counter to my expectations. A buy-write is when an investor or trader buys a stock and sells a call. The call provides extra income while limiting potential capital gains. Under what circumstance is it advantageous to engage in buy-writes?
**Chapter 13: Strategy Room**
This is a great chapter because Warner provides his thoughts and analysis on some common strategies such as:
- Naked Put;
- Bull Call Spread;
- Bear Put Spread;
- Backspreads;
- Calendar Call Spread;
- Backspread and Calendar Spread Combined;
- Butterfly Spread;
- Iron Butterfly;
- Condor;
- Iron Condor;
- Synthetics; and
- Dividend Plays.
Armed with this knowledge, you are better equipped to think about which strategies you want to employ under various circumstances.
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