Customer Reviews

Trading Options at Expiration: Strategies and Models for Winning the Endgame

5 star:		(12)
4 star:		(6)
3 star:		(3)
2 star:		(3)
1 star:		(5)

 

 

Before going into the details of my review I will quote some statements from the book:
"A relatively large amount of minute by minute stock and option data was used in preparation of this book....... First and foremost `in importance' was accuracy because slight discrepancies can cause significant errors in volatility calculations"

"It is certainly reasonable to study option expiration by studying the behavior of individual stocks that is one end of the spectrum . The other end involves development of custom data bases and software"
Before I buy any book, I usually look through the Table of Contents to get a glimpse of what the book covers. In this book the search inside feature was not available, so my decision to buy was based on the one review available at the time. Even though I am a successful options trader I could not resist the high potential profits in few hours mentioned in the review.
After reading the book, and based on the author's own assertions quoted above, an average option trader can use ideas qualitatively by studying the behavior of specific stocks and its effect on option premium at expiration. This may include volatility near expiration, open put call position lopsidedness, and distorted time value of the premium among others. While this information is available in other books , this book is useful in that it consolidates it in one small book together.
To quantitatively apply the concepts in this book you have to be able to: (1) obtain extensive and accurate stock and option data. (2) Be able to program and (3) be a full time dedicated option trader. Fortunately, I am a programmer and a full time option trader. I tried to get as accurate data as possible and generate option volatility decay charts for specific stocks I felt are good candidates. What I found is that there is a lot of noise in the volatility decay charts, as the author himself admits, that makes is difficult in practice to achieve such returns , even though it is possible in theory assuming ideal entry and exit.
I rate the book 5 stars for theory and research and 3 stars for practicality of application thus a total rating of 4 stars.

I'm an options trader. That's how I make my living. I've read all the books, been to the seminars, and have the scars from experience. So believe me when I say this book is different. It's not the same options books with a different cover. It's not going to start all over from scratch about what are options. This little book is packed with an out-of-the box winning strategy that takes advantage of the institutional moves (for once!). The pinning of stocks on expiration day is a phenomena that has been noted for some time. How to make money from this is not so clear. Mr. Augen takes advantage of institutional trading behavior on expiration day and details not only which stocks to trade but which strategy and what time of day to apply each strategy. [read this last sentence again] This approach is not conjecture but a statistical study as to how certain stocks move. This is a genuine money making strategy that can earn 200%-300% or more in a few hours. Just recently a straddle purchased on a stock mentioned in the book could have been purchased for $1 and sold for $6 a few hours later. The beautiful thing is that institutions can't even take advantage of this strategy!

My previous favorite book on options was Mr. Augen's Volatility Edge which, again, is in a class by itself. His next book was the Options Trader's Workbook which will push your knowledge on options like no other. I don't know why Mr. Augen is disseminating this strategy that most people would jealously guard. I can only assume from the nature of his other books that he is one of those who loves to teach and sees success in other people's success. Thank you Mr. Augen!

In a very pithy and dense 'follow-up' to his previous "classic" The Volatility Edge in Options Trading: New Technical Strategies for Investing in Unstable Markets and a reasonably good workbook The Options Trader's Workbook: A Problem-Solving Approach, Augen provides a (very) serious options trader some key insights and strategies in dealing with options expiration dynamics.

This book is not for the casual investor looking to make a quick profit and some of the strategies mentioned, as the author himself points out, could have implications regarding whether you could be classified as a day trader for tax purposes.

The book is organized in three chapters. In the first chapter, the author explains three key observations regarding option pricing dynamics - volatility collapse, strike price pinning, and acceleration of time decay. He explains how each of these components contribute to option prices in the expiration week (and day) and provides some strong hints as to how to exploit them using some detailed examples. In the second chapter, the author provides some guidelines on the use of statistical models to identify potential candidates for implementing some of the strategies based on the three concepts mentioned above. The third chapter provides detailed descriptions of specific trading strategies on expiration Thursday and Friday.

Now, the caveats. While the book provides a serious student of options and a trader some excellent insights, it is not clear how accessible the tools one may need to execute any strategies outlined (thankfully, the author doesn't provide or pretend to provide a formulaic approach, but rather a generic, well thought out framework with enough details that a serious reader can develop his/her own strategy based on risk profile). The effectiveness of these techniques cannot, obviously, be solely judged by the examples the book contains. So, one needs to take a patient approach in critiquing the book's approach - it will take some time to develop a trading strategy and enough data points to make any meaningful conclusions regarding the effectiveness. But, it is clear that a serious reader will benefit tremendously by being encouraged to look into a perhaps a niche area in option trading in a very systematic and through manner, which in itself can significantly improve one's experience in option trading. A must-have book for the serious options student/trader.

(for what it is worth, I consider myself as a fairly conservative options trader, mostly focusing on spread strategies with a day job far away from the trading pits)

I'm a professional trader and hedge fund manager, and I can confidently report that this book has added more value to my business than any of the dozens of other option trading books currently on my shelf. Many different people have written and talked about expiration trading, but Augen's book is the first to provide this level of detail and analysis. His discussion of the forces that drive expiration pricing - accelerated time decay, implied volatility collapse, and strike price pinning go way beyond anything ever written before. The description of implied volatility collapse on expiration Friday is especially important. Augen provides detailed charts and explanations that reveal a specific shape to the price collapse - rapid when the market opens, flat during the middle of the day, and very fast after 2:00. I was able to use this information to time my trades by going long during the midday stability window and short after 2:00. Augen also describes the effect that market efficiency has on expiration trading. He correctly points out that as the final day approaches, the market compensates for overnight time decay by collapsing option prices near the closing bell. I've been using this information to place trades late in the day that I close the next morning. This small piece of market insight would have been worth the price of 100 books for me. I plan to continue allocating more money to this strategy because, in terms of risk:reward, it eclipses everything else I am aware of.

First let me say that the strategies in this book are not easy to apply for the average or even the advanced trader.High quality minute by minute option data is needed to construct volatilty decay curves.The data is often plagued by "noise" as a result of unwinding of large positions that tend to form spikes in the curves that makes quantitative application of the concepts difficult. This is just the nature of option behavior near expiration and not the fault of the author's presentation.
The average trader can still extract useful information from this book , some of which I will mention here. Options are excerciesed the third Saturday and not Friday of the month, so it's possible that a high implied volatility option may still carry a high premium at the close on Friday. Lesson learned: do not sell high volatility options near the strike or in the money thinking a collapse will occur at expiration. Most large open position are unwound by 2PM, so it is better to wait after that to buy back a short option. The reason is that unwinding such positions will create spikes and artificially increases volatility and premiums.
Another tidbit I came out with is that stocks tend to migrate towards the strike price with the largest open position and highest volume on expiration day. This peice of information when applied correctly can help a trader in evaluating a potential stock trade.Other useful information can also be extracted.

The book is VERY interesting, but in an academic sort of way. If you are looking for anything of practical value, look elsewhere.

The author has done a lot of work - he collected an extensive (and expensive) historical database of minute-by-minute option prices, and then did an impressive analysis of this historical data. He presents relatively clearly the results of this data mining.

The main finding are that "pinning" occurs routinely on expiration day (not a big surprise anyway, and you get no hint how to guess to WHICH strike
price the pinning will occur, which is THE whole point) and that there seems to be a pattern as to how an option's prices goes to its intrinsic value (if any)
over the course of Expiration Thursday and Friday.

However, this is about it.

There is some vague and general discussion how the results show that it SHOULD be possible to have some edge when trading on the day of expiration and 1 day previously, but no clear strategy emerges.

It sounds intuitively appealing that on the last two days before expiration options fair-pricing algorithms can get a little out of
focus - just enough for you to exploit. Sadly, this book does not show you how to get this edge.

It shows examples that purport to show how the author got an edge trading in the past, but does NOT even spell out clearly which strategies are used.


By reverse-engineering the examples given, I derived 6 strategies the author used:
- ATM short straddle
- Just-OTM Straddle
- Ratio-Call (2x and 3X)
- OTM ratio call (3x)
- Long Straddle).
I built two excel models, one for Expiration Friday, and one for Expiration Thursday, where I cut-and-paste the options prices on these two days at various times of the day, and the model then analyzes all combinations for of the 6 strategies I derived from the text and calculates the result of applying these strategies along the lines the book recommends : open a position around 10am, AND CLOSE IT AROUND 2pm-3pm;

Sadly I have to report that after trying this for a few months on about 3-5 shares, I found no useful strategy - typically, IF I could guess in advance which strike prices to use, I could get an edge, but there is no pattern that i could find as to which of the 6 strategies would win with which combination of stike prices.
(and if I COULD guess which strikes will be "correct" to make for which strategy, I could win on any day, using any strategy ... )

For example, on a recent expiration Friday I collected all option prices for AAPL, and analyzed for all 6 strategies:

Strategy --> Winning Combination of Strike prices
=========== ===============================================
ATM short straddle --> Wins for strikes starting One "notch" below ATM and going up to 3 notches above ATM
Just OTM Straddle --> Same as above (not surprising - for these strikes, this is the same strategy)
3x Ratio Call --> Wins for buying a call at 1-3 strikes below ATM and selling 1-3 strikes above ATM
2X Ratio Call --> Same as above (at this strikes, it IS the same strategy)
OTM ratio Call --> Same as above (at this strikes, it IS the same strategy)
Long Straddle --> Wins for strikes 1-3 below ATM on both legs

So, to win, you have to (1) Correctly select the strategy from the above 6 possibilities and (21) select the correct combination of strike prices to use.
If you can do that then You are smarter than me and probably rich enough to not be reading this review anyway ...

Another problem, mentioned by another reviewer also, is that Fees and Bid/Ask spreads are ignored - and they are NOT negligible:
The typical "win" is on the order of $0.30-$0.40.
A round-trip (buy & Sell) fee for a 2-leg position is on the order of $25 (e.g. $12.95 is the minimum fee at OptionsXpress).

For a 10-contract position, assuming I win $0.50 per share, the total win will be $500, and just the fees are 5% of that.
So - you will have to trade LOTS of contracts, which is not a recommended situation for Risk-management. (A 10 contract
position on a $20 stock is already a $20,000 position)

Bid-Ask Spreads make this much worse, and larger positions will not fix them. Assume a bid/Ask spread of $0.25 (not a rare thing) and assume you will
be able to open the position at about mid-point of this, but when you close, you have to pay at the bid/ask (and remember you are closing late in the day
of expiration Thursday or Friday, where even the author says Bid/Ask spreads are likely to widen). So, a round-trip (open/close) will cost you about 50%
of the Bid/Ask spread. in this example, this means it costs you about $0.125 per share - leaving you only $0.375 from the $0.50 you were hoping to gain.

Add the two effects together, and you find that if all goes well, you will get $350 out of what was supposed to be $500 gain - and again,
this is *IF* all goes well ...

---
I'd give it 3 stars on research quality and interest, but Given the above, I find the title (and the blurb) misleading, and am docking it one star.

Bottom line - Academically interesting, but not practical.

This is a great book for serious and experienced option traders. The author discusses the effects of price pinning, volatility crash and time decay the last two days before option expiration and strategies - ratio spreads, straddles, strangles, etc for benefiting from these effects. This book is a logical continuation from his previous work - The Volatility Edge, however one does not need the first book to trade the ideas discussed here

Warning - the approach involves day trading and one needs an account that is not subject to the day-trading regulations ( > $25K) to trade around option expiration. This is not a reflection of the book or fault of the author, this is just the way things are

Highly recommended!

It is clear that Mr. Augen has done a lot of work and research in preparing this book. Through great data analysis he has narrowed the universe of stocks to 5 that best fit his philosophies / approach, and he walks through some theoretical trades that he could have maybe made around these stocks.

The problem is that all of the trades are just that - theoretical. They are all created based on old data. No insight is really given on how to make trades in real time. No information is given on safe stop levels (he merely mentions in passing that some trades may get stopped out). Worse, he will give contradictory information - that this trade works in one situation but not another - but no real basis to determine which is which. The "trading strategies" in chapter 3 are not really strategies at all, nor are any of the conditions for the trades spelled out. Even if you took the time to mine data like he did, and prepare your own universe of stocks, there is nothing in this book to guide real-time trading decisions. You'd just have some great tools to look back in time and see great trades you could have made.

This is not to mention that he completely ignores market realities like bid/ask spreads, rapid price movements, and the possibility that his trades may go against him (his examples are very cherry picked to show positive results - never does he show a losing trade, but he picks seemingly random expiration months as examples - probably those that best fit his data).

I would not recommend this book to anyone, as interesting as it was to read from an aesthetic point of view. There are tons of better books that give much more meaningful guidance on either trading options, or on specific trading strategies, than this waste of space.

I'm shocked that there are some positive review on this book. I can only assume they are friends or colleagues of the author.

The only way I could profit from this book now would be to resell it. I'm sorry I spent my hard-earned money on it.

I found the book difficult to understand, but then I realized it is the subject, not the writing, that is hard. The author does a remarkable job of explaining his approach. I would rate this the best book on trading I have found in years.

This book contains ideas that worth exploring. However, the presentation is extremely misleading. The author tends to present trades that worked under a specific scenario without devoting a fair space to analyze the risk involved. A novice trader could be easily mislead by the mirage of easy money. Although the author touted the attractive risk/reward ratio of his strategies through the book, no systematic analysis of risk/reward is included. In order to make use of the ideas, readers need to fill in the details of a strategy (entry/exit/etc), and have a back test plan to find out what the true risk/reward ratio is. Unfortunately the data needed for such an analysis is prohibitively expensive. If you are starting out with options, please DON'T read this book! It WON'T help you AT ALL! If you are well versed in option greeks and strategies, this book may give you new ideas to think about. Lastly, I borrowed this book from a library.