Customer Reviews

The Volatility Edge in Options Trading: New Technical Strategies for Investing in Unstable Markets

5 star:		(23)
4 star:		(8)
3 star:		(2)
2 star:		(2)
1 star:		(3)

 

 

A friend of mine in the trading industry suggested I read this gem of a book ... within a single weekend I did just that ... and what a gem it is!

Jeff Augen has put together a fine body of work in this book within which there are some seriously valuable nuggets of information.

The volatility spike graphs are a novelty in this business that anyone studying and trading volatility should benefit from. Essentially what he's uncovering is "differential volatility", in other words whether the volatility is being caused by buyers or sellers.

Typically, falling prices (due to selling action) will cause greater volatility, but not always. Sometimes the volatility is caused by rising prices. By understanding the direction in which the greater volatility of the underlying is occurring, the trader is able to position trades more appropriate to that skew. For example if the spikes indicate that volatility is caused by buying action then the calls may well be undervalued in advance of the next spike up. The trader can then make a double whammy trade, correct in direction and correctly in volatility.

Other nuggets include Jeff's slant on expiration date and earnings cycle trading, and the concept of stocks pinning to the strike, all of which are essential chapters in the book.

You'll be a more knowledgeable trader for reading this book and you should become a better trader for sure.

One of the few trading books that instructs the reader on when, where, why, and how to place an option trade that has an excellent statistical probability of success. His Standard Deviation Spike Graphs are useful in that they can help to identify (by scanning), and capitalize (complete trading plan)on profitable opportunities. There are many more useful bits of info. The author is a professional trader using the techniques he writes about; many of which I (20+ yr option student/vet) use, and can confirm that they work. He is also correct in stating that successful options trading is darn near a full time job. For new traders beware, his advice is geared towards bloodied experienced traders, so practice for a while. Micheal Jordan telling us his secrets on how he drove the lane against Jabbar, Worthy, and Rambus is useful but be careful during practice (a pull-up perimeter jumper might be lower risk at first). As always, any advice on trading without a complete trading plan will fail to help any trader. If you are close to making it, continue to learn all that you can while knowing that this book will definitely help push you over the edge into long term trading success. This book is a must for any trading shelf, and is a steal at this price.

An excellent book, with some novel ideas and concepts not covered in other books on options. Specifically useful are the following discussions:

- standard deviations and volatility charts
- discussions of liquidity and volatility swings
- hedging with VIX
- trading the earnings cycle
- trading the expiration cycle
- excellent coverage of all the main options strategies and spreads

Not a beginners book, and a year or two of decent options trading experience is recommended to get a good grasp of the concepts, but thats
great as there too many beginners book out there, all mostly the same!

Why is this book so much better than all the other books on trading options? Why is it better than the two day, $3,000 seminars on trading options advertised on TV or on the Internet?

Three reasons: several trading strategies are clearly described; a new type of charting technique is introduced which allows traders to visually evaluate a stock's price performance and then use that information to structure a trade that has a statistical edge; and numerous unique insights are presented that I had rarely or never seen in any other book or seminar. Incidentally the charting technique can be used very easily by traders who only trade stocks and not options.

I'll briefly describe the trading strategies, charts, and insights in chapters 3 through 8.

Chapter 3: This is the most useful material ever presented in any book on volatility, how to illustrate volatility visually on a unique type of chart, and then using the chart to make trading decisions. The discussion of differential volatility (different volatility for upward price move than downward) is totally unique to this book. A trading strategy is presented on trading cycles in volatility, which is visually illustrated in the context of gaining an edge of standard option pricing models.

Chapter 4: I was not aware that bid ask spreads could chew up so much of the profit from complex trades. I also found the best discussion ever on how short-term volatility swings affect option prices.

Chapter 5: First, a superb trading strategy is presented based on Augen's unique price charts. This strategy, based on a reversal of when price moves a specified number of standard deviations, as a trigger for entering trades, can be used very profitably by traders who only trade stocks. Note that a level of 1.5, 2, or 3 standard deviations can be used. Historical data on stocks can be downloaded for free from several websites. This section is worth its weight in gold. Second, I liked the section on trading synthetic stock. Traders who like to trade directionally will find ways to reduce their cost by selling an option against their long option, resulting in a reduced risk if wrong and a dramatically greater profit, if correct on direction. This section alone is worth its weight in platinum.

Chapter 6: Although there was not much material presented on calendar spreads, there is a very thorough discussion on diagonal spreads, which are closely related, with detailed mathematical examples. Also, the charts comparing Dow and OIH shows how to use charts in choosing which one would be a better candidate for a condor and where to set the short strikes.

Chapter 7: A complete chapter on trading volatility spikes before earnings are announced and volatility declines after the announcement. As the earnings cycle happens regularly four times a year, there are plenty of "fish" to catch. This chapter has detailed instructions on how to structure these trades.

Chapter 8: I had never seen a complete chapter on trading during the last week before options expiration. Augen boldly points out several characteristics of options expiration that may give the astute trader a statistical edge due to slight violations of actual trading versus the underlying statistical pricing model. I found the illustration of three different strategies for trading the Google expiration to be very helpful. The discussion of pinning behavior delves into more depth on this important topic than in any other options book.

Augen's writing style is both exciting and very succinct. Therefore, I could not put the book down but as soon as I finished, I knew that I had to read it again, and more carefully! I highly recommend this great book for options traders as well as stock traders too!

I have read many books on options -- from Cox/Rubinstein's mid-80s textbook treatise (now, sadly, out of print) to Bookstaber, to MacMillan, to Natenberg.

This is by far the best book on options I have read in years. A tremendous blend of the academic and practical, the mathematical and the tactical. Jeff's explanations of the various moving parts of option pricing is superb. Great graphs, tables, lucid writing.

Excellent examples of trade progressions so you can see how the value of a position alters dynamically -- whether over a single trading day such as expiration or over a number of days.

While this is aimed at a more advanced trader with a deeper understanding of both the mathematics of option pricing and descriptive statistics in general, I think even beginners should crack it open. Even if it is a bit of a struggle at first, you will be rewarded by reading it.

Highly recommended.

As someone that has been trading options for a couple of years now, I'm always looking for a new book to enhance my trading performance. This book definately is a must read for every options trader. Time and time again I see people trade options and lose money even though their opinion of the underlying is correct. This book gives the trader insight on when to enter and exit trades and why, which most options books fail to give.

The Volatility Edge also gives options traders methods on how to better graph historical volatility and underlying stock moves. These methods give the trader the ability to spot over priced and under priced options much easier.

Overall the book is great and easy to read. I hope the author continues to write on this topic.

This is a good book, even for a beginner like myself. Some reviewers complained that it is dry and has too much math or formula. I actually appreciate the dryness probably due to my background. I would rather read a sober analysis than a bunch of rules of thumbs or canned procedures, because it is easier for me to reason than to remember. The book made me better understand the complexity in option trading and the logics behind structuring and managing positions with many examples. There is no doubt that correct applications of the principles discussed in the book requires lots of experience and various tools.

The math and formula are really quite elementary. They are interesting; however, they do not seem to relate to later discussions very much. I would rather like to see more of their applications in the later examples.

The key learning I got from the book is that option positions are very dynamic. This of course is very much true in real life but is often not taught in introductory books. The logics or principles described in the book can be very useful in handling the dynamics. This is just the starting point. Actually applying them, corretly, is much more difficult. But I still think if you want to trade option, you should read this book before doing so. Otherwise, you don't know what you are getting into.

This is an excellent resource for those who want to really understand more complex option positions and trade management. He explains the theory and mathematics very well. I've been able to replicate his "spike" analysis in MS Excel and have back tested many of his examples. Jeff is top notch as far as applying his background from life sciences and technology to trading financial markets. One key thing I learned was to manage the option trade itself and not the underlying or holding until expiration. Also there are several examples of market behavior that are inexplicable with Black-Scholes theory and he shows you how to spot those opportunities. You'll find good suggestions for trading the earnings and expiration cycle too. Volatility and Time are what you are trading with options. One caution, some of the trades involve short positions and he explains delta-neutral tips from professional hedgers. You just have to manage your own risk and work with what you are comfortable with. I've found this book very useful in setting up option income trades like Long Iron Condors and selling Put or Call spreads. You'll need to go through the book a few times. It makes much more sense as you apply these principles to real trades.

Jeff Augen has provided an elegant, effective, analytical presentation of Option trading strategies without eschewing mathematical rigor. Because of its focus on practical trading, this book is readable by most equity and index option traders except those who are allergic to the mere mention of mathematical equations.

The author has provided `statistical insight into the dynamics of price change behavior and volatility', which is useful information for the serious trader. This is true of every chapter except the last one, where the author has indulged himself in a presentation of `Building the Toolset' (an overview of the author's creation of thousands of lines of computer code).

I agree with the author's lament that `the financial world has chosen to substitute careful scientific analysis with something far less precise - the opinions of financial analysts, who tend to be short on accurate predictions but long on after-the-fact analysis. Such an over reliance on `expert opinions' is not all that bad, since it served as the motivation for the author's excellent work.

If you are new to option trading, you would not find the brief 4-page discussion of `Background and Terms' adequate. You might want to read a book such as Guy Cohen's `Options Made easy' before continuing on with Augen's book.

In chapter 1, the author proposes the use of standard deviations to represent price changes in place of usual closing price chart and in the next several chapters makes a clear presentation of why such (standard deviation) charts are superior from a trader's point of view. Although I enjoyed the rigorous presentation of equations for the Black Scholes pricing model, this discussion may not be every reader's `cup of tea'. Such a reader may find Dan Passarelli's book `Trading Option Greeks' more amenable.

Chapter 3 on `Volatility' notes how in falling markets volatility tends to rise and in rising markets volatility tends to fall. However, volatility alone is a poor indicator of price change behavior. Therefore, it is important to have a balanced view of historical volatility and price change behavior in terms of size and frequency of spikes (large standard deviations).

Chapter 4 `General Considerations' includes valuable information such as this: ` an interesting strategy involves structuring a long position that benefits from increasing volatility and closing the trade just before earnings are released.' This chapter also illustrates with a clear example how `much information can be gleaned from a level II quote'. After reading this chapter, traders should no longer be surprised if call prices drop despite a rise in the underlying stock, since they would learn to attribute such effect to falling volatility that accompanies an increasingly stable rising stock.

In Chapter 5 `Managing Basic Option Positions' the author makes another excellent point: `Treating option positions as static entities that have a range of values at expiration has been the downfall of many books on the subject'. Despite this view, I wish the author chose to include Profit & Loss profile diagrams (such as the ones in Passarelli's book), for at least the basic option positions, indicating the profile at trade date, an intermediate date and at expiry. I hold this view despite my total agreement with the author's statement that `opening a position and leaving it until expiration is rarely the best strategy.' The author's admonition to `focus on trading the option and not the underlying' does not necessarily apply to (my favorite strategy) deep in the money calls, which behave like synthetic stocks at a fraction of the cost. Of course, the author is well aware of this, since he observes that long call positions perform better than short put positions as a (synthetic) replacement for stock.

The author goes on to discuss `Managing Complex Option Positions', and how to trade the earnings cycle and expiration cycle. I believe that a trader should trade only at the level of complexity that he can fully understand and profit from. If he wishes to indulge in more complex positions he should thoroughly soak in the knowledge exhibited in Augen's book before venturing beyond his normal reach.

Ultimately, a trader wins if he is right (whether he bets on higher/lower prices or higher/lower volatility) and loses if he is wrong. The only thing he can do is improve the odds of being right and hold the losses to manageable levels when he is wrong.
Options Made Easy: Your Guide to Profitable Trading (2nd Edition)Trading Option Greeks: How Time, Volatility, and Other Pricing Factors Drive Profit

This is one of the best books on options in my library! I'm a programmer and found Jeff Augen's descriptions of exactly how he calculated volatility and standard deviations. I duplicated it and compared it to iVolatility's historical data and it was dead on. I had thought of the Price Spike charts before reading this book but the author does a good job of explaining how to use them in your option trading. There are many nuggest you can use as an option trader in this book. I suggest re-reading it a few times so it all sinks in.