Customer Reviews

Options Volatility Trading: Strategies for Profiting from Market Swings

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1 star:		(4)

 

 

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.


**Chapter 14: Ultra and Inverse ETFs**

I found this chapter surprising, because even though I am well versed in how double and triple exchange traded funds (ETFs) work, I didn't realize the size and scope of some of these ETFs. If you don't understand how ultra and inverse ETFs grind your results down over time, you definitely need read and understand this chapter. And perhaps you'll be surprised too at how important these ultra and inverse ETFs have become to the markets.

**Chapter 15: Chartin' Them Derivatives**

Many investors have profited by using technical analysis. In this chapter, Warner cautions traders not to employ the same methodology to derivatives. Under certain circumstances, it might provide some additional guidance around the edges.


**Chapter 16: Plus Ticks and Other Rules**

The key theme in this chapter is that you must trade the market you're given, not the market you would like it to be. Whether you agree with the plus tick rule for shorting stocks is irrelevant. Trade the market with rules as they exist.

I bought this book on whim. (Actually, Amazon recommended it.) It was well worth the money. I have learned more on a just a few pages than I have from years of experience.

I do admit that there are some parts of the book that go on and on. I think that's probably because the publisher said "Adam, the book needs to have about 300 pages or people won't buy it." The book could probably be cut in half and been just as valuable to me.

One of the other readers commented about the writing style. I understand the concern. Frankly, I love Adam's style. (Check out his blog and follow him on Twitter/StockTwits.) What you will find in the book is a lot of excerpts from other peoples writing. Adam gives due credit to the authors, but sometimes the style changes are like hitting a speed-bump at 45 mph.

The parts on the VIX were absolutely outstanding. Also, discussion of pinning was something I thought I understood, but really had it wrong. Adam does a great job explaining these.

One of the most important points about this book is that YOU SHOULD NOT TRADE THE VIX. If you think you want to trade the VIX, read this book. If you still want to trade the VIX you are either dense, crazy, or a very very sophisticated trader.

This book is not for people who are not already experienced with options. You need to have a good solid understanding of options before reading this book.

I will mention that I was hoping to find more on specific strategies that take advantage of changes in Implied Volatility. But, in all fairness to Adam and the book, he does not claim to provide a cookbook or recipe for trades. Rather he provides the concepts to better understand them. And he delivers on that promise.

Bravo Adam! This is one of the best books that I have read in a while.

Despite a few shortcomings, I'll give it 5 stars. (Also, I want to offset some of those people who gave it 1 star. I don't want to pass any judgment on their level of experience or intelligence, but they probably shouldn't have bought the book in the first place.)

Regarding Options Trading I say: Options Yes - okay, Options No - okay, Options Maybe - you get squished by the market (Mr. Miyagi said to Karate Kid: `Karate Yes' - okay, `Karate No' - okay, `Karate Maybe' - you get squished like a grape). Trading is profitable if you get the direction right; be it stock or options trading, whether you are betting on price movement or volatility movement.

Warner's book is definitely not for the beginner in options. If you have not heard of the `Greeks' before, read a book such as `Volatile Markets Made easy: Trading Stocks and Options for Increased Profits' by Guy Cohen, before attempting to read Warner's book. If you have no patience in reading an `opaque chapter' and reading it again to discover the nuggets of wisdom,this book is not for you. Definitely do not attempt to read the entire book in a single weekend (as I like to do); it can be hazardous to your brain.

It seems unclear which audience Adam Warner intended this book for. Perhaps that's why despite having read a dozen or so books on Options trading before, Adam Warner leaves me in a fog. Options Trading knowledge and expertise clearly abounds in Mr. Warner's veins. It would be much easier on the reader if he knew before hand, whether this book is intended for him. (For example on page 26 Warner states `As a Floor Trader, you end up with all sorts of complex positions).

Is this book a manifestation of a Market Maker seeking redemption for some other market maker's shenanigans? Warner's opening chapter (Who Am I? Why Am I here?) is full of statements defending Market Makers and Specialists; it is interesting reading but does not contribute to the reader's successful trading.

While discussing Greeks, Warner's dual characterization of a Call Option's Delta as Leverage vs. Embedded Put is interesting and illuminating.

Warner introduces VIX in all its glory in chapters 3-5.His expose of the Volatility Timing in terms of the (daily and monthly biases) VIX levels leads to valuable insight into option trading: `If you intend to buy options, avoid the very end of an expiration cycle and the beginning of the next one. Of course, this assumes that VIX volatility and the specific option volatility are (highly) correlated. See the excellent defense by Warner of why VIX did not fail when it could not forecast the S&P 500 drop in 2008; it's the correlation, stupid!

Warner states `I am not a big stickler for requiring knowledge of every last term. It's more important that you understand the risk and reward picture ... than to know exactly what to call those attributes'; I couldn't disagree more. It's paramount to call them by their correct name (lest you incur the wrath of the Greeks!).Perhaps this attitude led Wagner to use the nebulous terms `Fixed Variable' and `Moving Variable' (page 13). Yes, the input variables to the options modeling equation (Stock Price, Strike Price, volatility, Interest Rate, Dividend, Days to Expiry, Days to Ex-Dividend) determine the calculated Option Value (or Premium); of these all but Volatility are variables whose values are known (not fixed) and implied volatility is that volatility value which makes the calculated option value match the market (between Bid and Ask).The modeling equation also calculates the Greeks.

Warner's story of the Long Gamma Man and Ms. Premium Seller in the context of a Straddle strategy for trading volatility makes for entertaining reading albeit a bit challenging for a beginner. (You may read Guy Cohen's Options Made easy for the same strategy if you wish to `see' what's going on in graphical pictures of the Greeks as well as the Profit Loss profile). Warner's recommendation of `flipping stocks' as the underlying moves, is not for most traders; it should be understood well before employing the strategy. Cohen's approach is straight-forward options buying and profiting from increased volatility.

Warner's Strategy Room (option strategies)proves that he can be transparent and informative if he chooses to be; but if the author chooses to amuse himself while writing this book who can blame him.

Volatile Markets Made Easy: Trading Stocks and Options for Increased Profits
Options Made Easy: Your Guide to Profitable Trading (2nd Edition)

Adam's book is the most practical book on Options and Volatility Trading I have read. He avoids much of the confusing (and irrelevant) rhetoric included in most Options texts and provides readers a practical and intuitive explanation of what options are, how investors can use options to generate incremental profits for their portfolios, construct targeted trading strategies with attractive risk/reward characteristics and use options to manage risk. This book is applicable for both beginners as well as advanced options traders / research analysts. Don't get me wrong, in-depth mathematical theories are relevant in a broader academic context; it has its place. Adam's place is on the trading floor; this book takes you into the action and puts you in a position to become a better options trader. A must read.

It is amazing how somebody with little knowldge about options trading (in his/her own words) rate this book 1 star only. If you are looking for a book to re-define what a call option is then you really don't need to buy a book at all. Just get the info online. If you want to really take your trading to the next level then this is for you. I assure you that chapter 6 (How Do Traders Trade Volatility) and chapter 7 (Options and the Quarterly Earnings Report) provide the clearest, most practical, and most insughtful description of options volatility trading that I have ever seen. Additionally, the author's blog is one of the best around. I strongly recommend this book for intermediate to advanced readers. Not for beginners.

This book is a lot like running a diamond mine. You need to sift through tons of junk to get even a tiny gem out. Yes there are a few small gems to be found here. However they are well buried.

If you want a mathematical treatment try Hull. Make sure you know your calculus and probability theory.

If you want something with substance try Augen. Have some experience first.

If you want a beginner's book....there are tons of them.

If you want to be tortured by writing style and incomplete treatment buy this one. Don't think it will appeal to any novices and few experienced traders.

This was the first book that I had picked up regarding volatility.
After having branched out and read other books, mainly by Augen, looking back I see how badly structured it was written.
I do not recommend this book.

This is certainly one of the most poorly-written books I've ever read. Purportedly about options volatility, the book's first chapter sets a tone of much head-scratching to come with a number of stories about what it's like to be an options "market maker", none of which are vaguely related to the book's topic. Worse, each vignette is obtusely told using an excruciating onslaught of insider slang and expert-level shorthand that renders it intellectually unavailable to the average reader. Wading through this chapter I felt rather like a six-year-old stuck in a roomful of aging tycoons all spinning tall yarns of past financial conquests and exchanging secret handshakes while I sat helpless to comprehend anything about them other than the smell of their cigar smoke. It doesn't help that the whole chapter is a grammatical train wreck, most of which is curiously written in the second person and in no particular verb tense.

The second chapter begins hopefully with a discussion of option "Greeks". An explanation of "delta" starts off well enough, but then immediately degenerates into an impenetrable blather. The author gives illustrative examples of delta that are inexplicably inflated by several orders of magnitude (more insider shorthand?), mentions only in passing why an option's delta value might be an important strategic consideration to an options trader, appears to confuse the concept of delta with how many shares an option controls, and then digresses into the importance of position sizing which, unless he knows something he failed to explain, would not appear to be germane to the discussion of delta. The next section on "gamma" is no better, with examples that can only be misprints (for together they make no mathematical sense) and more pointless digressions.

And that, which happens to have been on page 25, is where preservation of sanity required that I stop. The only thing I learned about volatility from struggling through the first few pages of this thoroughly unreadable work was that my brain became alarmingly volatile while reading it.

Words cannot tell how little value I received from this book. I have limited knowledge about trading options and I hoped that this book would help me beyond the covered write strategy I presently use. It did not help me. Often I found the author's explanations cryptic, vague and very hard to follow.
Some of his ramblings took a complete chapter to describe a concept that he conclude had no relevant value. As soon as I finished reading (skimming) the final two chapters, I "put" the book in the garbage.
This book may appeal to seasoned option traders but if like me, you are a novice, pass this one by.

While this this book has an occasional tidbit of useful information, the writing style is annoying and much of information is poorly presented.