The Option Trader's Workbook: A Problem-Solving Approach

( 11 )

Overview

Successful options trading requires extensive practice. Most options books offer theory and strategies, but don't offer the practice needed to prepare for real-world trades, where the wrong split-second decisions can cost you dearly. Expert trader Jeff Augen covers every key scenario you'll encounter in modern options trading, guides you through successful trade executions, and shows how to overcome key pitfalls that trip up most traders. You'll walk through trades designed to profit from changing prices and ...

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Overview

Successful options trading requires extensive practice. Most options books offer theory and strategies, but don't offer the practice needed to prepare for real-world trades, where the wrong split-second decisions can cost you dearly. Expert trader Jeff Augen covers every key scenario you'll encounter in modern options trading, guides you through successful trade executions, and shows how to overcome key pitfalls that trip up most traders. You'll walk through trades designed to profit from changing prices and volatility, time decay, rapid price spikes, and many other factors.

This second edition introduces powerful new techniques, and reflects the long-term impacts of the 2009 crash. New problems include:

  • New CBOE Weekly Options Expiration options, and their unique pricing dynamics.
  • Using collars, covered calls, and covered puts to structure income-generating trades with well-defined risk profiles.
  • Using ratio trading, VIX options, volatility ETFs, and variance trading to generate profits from shifts in volatility.

Each section contains beginner, intermediate, and advanced sections, helping you build your skills one trade at a time, no matter how much experience you have--or how little. You'll find several hundred questions, all designed to mirror real life, and supported with clearly explained solutions.

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Product Details

  • ISBN-13: 9780137148103
  • Publisher: FT Press
  • Publication date: 12/29/2008
  • Pages: 228
  • Sales rank: 1,192,267
  • Product dimensions: 6.90 (w) x 9.00 (h) x 0.80 (d)

Meet the Author

Jeff Augen, currently a private investor and writer, has spent more than a decade building a unique intellectual property portfolio of databases, algorithms, and associated software for technical analysis of derivatives prices. His work, which includes more than a million lines of computer code, is particularly focused on the identification of subtle anomalies and price distortions.

Augen has a 25-year history in information technology. As cofounding executive of IBM’s Life Sciences Computing business, he defined a growth strategy that resulted in $1.2 billion of new revenue and managed a large portfolio of venture capital investments. From 2002 to 2005, Augen was President and CEO of TurboWorx Inc., a technical computing software company founded by the chairman of the Department of Computer Science at Yale University. His books include Microsoft Excel for Stock and Option Traders, Trading Realities, Day Trading Options, Trading Options at Expiration, The Option Trader’s Workbook, and The Volatility Edge in Options Trading. He currently teaches option trading classes at the New York Institute of Finance and writes a weekly column for Stocks, Futures and Options magazine.

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Read an Excerpt

Preface Preface

There are two kinds of successful investors: those who admit to occasionally losing money and those who don’t. Despite claims to the contrary, every investor loses money because risk always scales in proportion to reward. Long-term winners don’t succeed by never losing; they succeed because their trades are well thought out and carefully structured. That said, very few investors recognize the impact of their own trading mistakes.

These mistakes can be subtle. The classic example goes something like this:


  1. “I bought calls.”
  2. “The stock went up, but I still lost money!”

This frustrating scenario in which an investor correctly predicts a stock’s direction but loses money is incredibly common in the option trading world. Leverage is almost always the culprit. More precisely, it is the misuse of leverage that stems from a fundamental misunderstanding of risk that so often turns investing into gambling with the simple click of a mouse. Option traders are famous for this mistake. They know, for example, that a sharp rise in the price of a stock can generate tremendous profit from nearly worthless far out-of-the-money calls. But lead is not so easily transmuted into gold. The problem is entangled with complex issues like collapsing volatility, accelerating time decay, and regression toward the mean. Institutional traders understand these issues and they rarely make these mistakes. Thousands of trades have taught them that not losing money is the very best way to generate a profit.

It’s the thousands of trades, winners and losers both, that separate professionals from amateurs.Option trading is just like playing chess: It requires study and practice. The comparison is more valid than you might think. Both chess and option trading are governed by a complex set of rules. Risk analysis is at the center of both games; so is positional judgment and the ability to react quickly. Chess players learn to identify patterns; option traders, in their own way, must learn to do the same.

This book is constructed around these themes. It is designed to let investors explore a vast array of rules and trade structures by solving real-life problems. This approach differs markedly from the catalog of structured trades that seems to have become the contemporary standard for option trading books. Many fine texts have been written on the subject, but most build on this design with slightly different organization or a few novel trading ideas. Collectively they miss the point. Learning to trade options is an active process, best accomplished through doing rather than reading and memorizing. In this regard we have avoided the familiar but bewildering list that includes names like “reverse diagonal calendar spread,” “condor,” and “short strangle.” In their place you will find more descriptive phrases like “sell the near-dated option and buy the far-dated option.” But, more importantly, these descriptions appear in the context of trading situations in which the reader is asked to make a choice, predict an outcome, or design a correction. Moreover, the problems build on each other with each section progressing from basic to advanced.

Our goal was to challenge option traders at all levels. So take your time, work through the problems at a comfortable pace, and, most important of all, make your trading mistakes here instead of in your brokerage account.

© Copyright Pearson Education. All rights reserved.

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Table of Contents

Preface xi
Notes 1
Chapter 1: Pricing Basics 3
Chapter 2: Purchasing Puts and Calls 43
Chapter 3: Covered Puts and Calls 91
Chapter 4: Complex Trades--Part 1 125
Chapter 5: Complex Trades--Part 2 173
Chapter 6: Advanced Ratio Trades 219
Chapter 7: Stock and Option Trades 251
Chapter 8: Trading the Weekly Options Expiration 261
Glossary 273
Index 279
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Preface

Preface Preface

There are two kinds of successful investors: those who admit to occasionally losing money and those who don’t. Despite claims to the contrary, every investor loses money because risk always scales in proportion to reward. Long-term winners don’t succeed by never losing; they succeed because their trades are well thought out and carefully structured. That said, very few investors recognize the impact of their own trading mistakes.

These mistakes can be subtle. The classic example goes something like this:


  1. “I bought calls.”
  2. “The stock went up, but I still lost money!”

This frustrating scenario in which an investor correctly predicts a stock’s direction but loses money is incredibly common in the option trading world. Leverage is almost always the culprit. More precisely, it is the misuse of leverage that stems from a fundamental misunderstanding of risk that so often turns investing into gambling with the simple click of a mouse. Option traders are famous for this mistake. They know, for example, that a sharp rise in the price of a stock can generate tremendous profit from nearly worthless far out-of-the-money calls. But lead is not so easily transmuted into gold. The problem is entangled with complex issues like collapsing volatility, accelerating time decay, and regression toward the mean. Institutional traders understand these issues and they rarely make these mistakes. Thousands of trades have taught them that not losing money is the very best way to generate a profit.

It’s the thousandsof trades, winners and losers both, that separate professionals from amateurs. Option trading is just like playing chess: It requires study and practice. The comparison is more valid than you might think. Both chess and option trading are governed by a complex set of rules. Risk analysis is at the center of both games; so is positional judgment and the ability to react quickly. Chess players learn to identify patterns; option traders, in their own way, must learn to do the same.

This book is constructed around these themes. It is designed to let investors explore a vast array of rules and trade structures by solving real-life problems. This approach differs markedly from the catalog of structured trades that seems to have become the contemporary standard for option trading books. Many fine texts have been written on the subject, but most build on this design with slightly different organization or a few novel trading ideas. Collectively they miss the point. Learning to trade options is an active process, best accomplished through doing rather than reading and memorizing. In this regard we have avoided the familiar but bewildering list that includes names like “reverse diagonal calendar spread,” “condor,” and “short strangle.” In their place you will find more descriptive phrases like “sell the near-dated option and buy the far-dated option.” But, more importantly, these descriptions appear in the context of trading situations in which the reader is asked to make a choice, predict an outcome, or design a correction. Moreover, the problems build on each other with each section progressing from basic to advanced.

Our goal was to challenge option traders at all levels. So take your time, work through the problems at a comfortable pace, and, most important of all, make your trading mistakes here instead of in your brokerage account.


© Copyright Pearson Education. All rights reserved.

Read More Show Less

Customer Reviews

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( 11 )
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Sort by: Showing 1 – 12 of 11 Customer Reviews
  • Anonymous

    Posted November 1, 2009

    The title says it all.

    This book is not for the beginner. The book reads like an exam test prep guide more than a learning tool. On page 6, you are asked, "Can you determine the strike price without knowing the implied volatility or the risk-free interest rate?" If you don't know your theta from your delta, look elsewhere.

    2 out of 5 people found this review helpful.

    Was this review helpful? Yes  No   Report this review
  • Anonymous

    Posted July 17, 2012

    Highly Recommended

    No matter how many books on options you read, you will not come to a complete understanding of the many ins and outs of options until you work through this book.

    Was this review helpful? Yes  No   Report this review
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    Posted August 1, 2011

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