Options Volatility Trading deconstructs some of the common misunderstandings about volatility trading and shows you how to successfully manage an options trading account and investment portfolio with expertise. This reliable guidebook provides an in-depth look at the volatility index (VIX) and demonstrates how to use it in conjunction with other analytical tools to determine an accurate measure of investor sentiment. However, recognizing a trend isn’t enough.
Author’s Note:
Volatility affects all types of trading, whether you ever lay your eyes on an options screen or not. This book will both help deconstruct some commonly held myths about options and volatility, as well as teach readers how to manage and profit from them. Awareness of the whole concept of volatility has grown by leaps and bounds over the past decade. Unfortunately, so has the misunderstanding of what it all means. Options Volatility Trading will show you how to best measure volatility and how to manage an active account or an investment portfolio in a world of ever-changing risk premiums. And you might actually have some fun doing it!
Numbers? We’ve got numbers. You will learn some factoids about The CBOE Volatility Index, affectionately known as the “VIX” that you never even thought to ask. What days of the week or the expiration cycle might make sense to look for certain types of trades? What happens to volatility at different times of the year or around holidays? Or on different days of the week? You will see plenty of data suggesting different seasonal plays, ideas of what to do when volatility does “X” and the put/call does “Y,” and so on. But this is not a systems book; it’s a concepts book. We’re not here to just give away the fish, as if there was such a simple fish to begin with. We’re here to teach you how to fish—minus an overabundance of fishing and hunting and poker-playing clichés like the one I just used.
Don’t get me wrong, I love to read studies along the lines of, “When we see such and such backdrop, the market has risen 14 of the last 17 times over the next two weeks,” and so on. The trick though is not finding and exploiting pot odds like these; it’s handling trades and positions when you get those rare outliers. I frequently omitted 2008 as part of my statistical work. Why? Well, partly because I would waste everyone’s time putting a caveat on every statistical observation with, “If we eliminate 2008, we see a very different picture.” Consider this one big caveat. Including 2008, of course, provides the most complete and correct picture—if our only goal was to produce a series of hard and fast rules. It’s not. We strive more for guidelines, knowledge that perhaps you throw into your tool set when making trading decisions in any given market.
Volatility analysis always revolves around an assumption of mean reversion, that is, a tendency of moves in one direction to ultimately “revert” to some sort of perceived “mean.” But mean reversion is an amorphous concept. The same way that there is no one single correct Price-to-Earnings ratio or price-to-book valuation or any valuation metric, there’s no correct VIX. Sure, we can get average and median readings over any time frame. But means themselves fluctuate. The year 2008 was about a worldwide diversion from the mean of any and all asset classes. The lesson to me was not that rules stopped working but rather it was that we should always be cognizant that rules can stop working at any time. And we need to trade and invest accordingly.
Contents:
- Who Am I? Why Am I Here?
- Know Your Greeks
- Understanding the VIX
- Nuts and Bolts VIX
- Volatility Timing
- How Do Traders Trade Volatility?
- Options and the Quarterly Earnings Report
- Like the Weather—The Trader VIX and Why It Doesn’t Do What You Think It Does
- Ratio, Ratio
- We’re (Pin) Jammin’
- Myth-Busting and Other Assorted Options-and Expiration-Related Stats
- Buy-Write—You Bet
- Strategy Room
- Ultra and Inverse ETFs
- Chartin’ Them Derivatives
- Plus Ticks and Other Rules
Options Volatility Trading: Strategies for Profiting from Market Swings By Adam Warner pdf
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