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Volatility Edge in Options Trading, The: New Technical Strategies for Investing in Unstable Markets, 1st edition

Published by FT Press (January 17, 2008) © 2008

  • Jeff Augen
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In The Volatility Edge, options trader and researcher Jeff Augen introduces a breakthrough strategy for fully leveraging the immense opportunities that arise from market volatility. Drawing on more than a decade of never-before-published research, Augen provides new analytical techniques and visual tools that every experienced options trader can use. For the first time, Augen bridges the gap between pricing theory mathematics and market realities, providing new data visualization tools and analytical techniques for studying historical price change behavior, making more profitable trading decisions, and systematically managing and mitigating risk. Augen covers topics addressed in no other options trading book, introducing innovative new strategies for exploiting rising volatility that precedes most earnings releases; trading the monthly options expiration cycle; leveraging put:call price parity disruptions; understanding the impact of weekend and end-of-month timeframes on bid-ask spreads; and using the CBOE Volatility Index (VIX) more effectively. Unlike conventional guides, The Volatility Edge doesn't rely on oversimplified, artificial positional analyses: it reflects ongoing changes in the prices of underlying securities, market volatility, and time decay.

Acknowledgments . . . xi

About the Author . . . xii

Preface . . . xiii

A Guide for Readers . . . xv

1. Introduction . . . 1

Price Discovery and Market Stability . . . 6

Practical Limitations of Technical Charting . . . 9

Background and Terms . . . 12

Securing a Technical Edge . . . 16

Endnote  . . . 21

2. Fundamentals of Option Pricing . . . 23

Random Walks and Brownian Motion . . . 25

The Black-Scholes Pricing Model . . . 29

The Greeks: Delta, Gamma, Vega, Theta, and Rho . . . 32

Binomial Trees: An Alternative Pricing Model  . . . 42

Summary . . . 45

Further Reading  . . . 45

Endnotes . . . 46

3. Volatility . . . 47

Volatility and Standard Deviation . . . 48

Calculating Historical Volatility . . . 50

Profiling Price Change Behavior . . . 61

Summary . . . 75

Further Reading . . . 76

4. General Considerations . . . 77

Bid-Ask Spreads . . . 79

Volatility Swings . . . 82

Put-Call Parity Violations  . . . 89

Liquidity . . . 91

Summary . . . 95

Further Reading  . . . 97

Endnotes . . . 97

5. Managing Basic Option Positions . . . 99

Single-Sided Put and Call Positions . . . 100

Straddles and Strangles . . . 118

Covered Calls and Puts  . . . 137

Synthetic Stock . . . 143

Summary . . . 146

Further Reading . . . 148

Endnotes . . . 149

6. Managing Complex Positions . . . 151

Calendar and Diagonal Spreads . . . 152

Ratios . . . 162

Ratios That Span Multiple Expiration Dates . . . 175

Complex Multipart Trades . . . 182

Hedging with the VIX . . . 195

Summary . . . 202

Further Reading . . . 203

Endnotes . . . 204

7. Trading the Earnings Cycle . . . 205

Exploiting Earnings-Associated Rising Volatility . . . 207

Exploiting Post-Earnings Implied Volatility Collapse . . . 21

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