The New Option Secret - Volatility: The Weapon of the Professional Trader and the Most Important Indicator in Option Trading

329 Pages·2012·19.26 MB·English

by  David L. Caplan

Copyright© 1996, David L. Caplan
Published by Marketplace Books.
All rights reserved.
Reproduction or translation of any part of this work beyond that permitted by
section 107 or 108 of the 1976 United States Copyright Act without the
permission of the copyright owner is unlawful. Requests for permission or
further information should be addressed to the Permissions Department at
Traders' Library.
This publication is designed to provide accurate and authoritative information in
regard to the subject matter covered. It is sold with the understanding that neither
the author nor the publisher is engaged in rendering legal, accounting, or other
professional service. If legal advice or other expert assistance is required, the
services of a competent professional person should be sought. ·
From a Declaration of Principles jointly adopted by a Committee of the
American Bar Association and a Committee of Publishers.
Charts are reprinted by permission of:
FutureSource, 955 Parkview, Lombard, IL 60148, [phone]
Chronometrics, 1901 Raymond drive, Northbrook, IL 60062, [phone]
Opportunities In Options, Inc., P.O. Box 2126, Malibu, CA 90265, (310) 456-
9699
Volatility Charts: Option Vue Systems International, 1117 S. Milwaukee Ave.
Suite C–10, Libertyville, IL 60048, [phone]
There is risk of loss in all trading. Any time an option is sold there is an
unlimited risk of loss, and when an option is purchased the entire premium is at
risk. In addition, any time an option is purchased or sold, transaction costs,
including brokerage and exchange fees are at risk. No representation is made
regarding the success of our recommendations or that any account is likely to
achieve profits or losses similar to those shown, or in any amount. Any account
may experience different results depending on factors such as timing of trades
and account size. Trading is risky, and many traders lose money. Before trading,
one should be aware that with the potential for profits, there is also potential for
losses which may be large. All opinions expressed are subject to change without
notice.
eISBN 978-1-59280-529-7
Adapted to ePUB in the United States of America.
Contents
SECTION I
Trading Plan and Special Circumstances
CHAPTER 1
The Option Secret - Using Option Volatility to Take Advantage of
Trading Opportunities
CHAPTER 2
Step No. 1 — Formulating Your Option Trading Plan
CHAPTER 3
Money Management When Trading Options
CHAPTER 4
Using Special Circumstances to Improve Your Odds of Success in
Trading
CHAPTER 5
Special Circumstances by Way of Option Skewing; What it is,
Why it Exists, and How to Use it.
Section II
Using Volatility to Determine
Actual Trading Strategies
CHAPTER 6
Analyzing Your Option Trading Opportunities
CHAPTER 7
How Option Volatility Determines Which Option Strategy to Use
CHAPTER 8
Using The Neutral Option Trading Strategy to Trade Like a
“Bookie”
CHAPTER 9
Using “The Free Trade” to Construct a Large Position
CHAPTER 10
“The Ratio Option Spread” How it Works and Why It's One of
Our Favorite Trades.
CHAPTER 11
Using “In-The-Money Options” to Take Advantage of Option
Price Disparities
CHAPTER 12
The “Calendar Spread”
CHAPTER 13
“No-Cost Option Strategy”
CHAPTER 14
Monitoring Your Positions and Follow-up Strategies
SECTION III
The Technical Material
CHAPTER 15
An Options Overview
CHAPTER 16
Types of Volatility
CHAPTER 17
Technical Explanation of the Use of Vega, Delta, and Theta
CHAPTER 18
Trading Gems and Tidbits
CHAPTER 19
Special Articles
Section IV
Trading Rules and Articles
APPENDIX A
APPENDIX B
Charts Of Volatility Of Future Options
BIBLIOGRAPHY
RECOMMENDED READING
INTRODUCTION
This book is dedicated to all traders who have decided that there is more to
trading than just following a moving average, or a television commentator’s
view on the market. It is for those who are seeking a “Trading Edge” over the
markets; an advantage over others in this most difficult, but also most rewarding
of all professions.
This book is not for the trader who has decided that it looks easy to make money
in this “game” and by spending very little time, he can just buy a futures contract
in his favorite market and place a “stop loss” for protection. In fact, if you are
proficient enough to have successfully done this on a regular basis over many
years, we would like to have you trade our own money. This is a book for
individuals who are willing to spend the extra time and effort necessary to learn
methods that can provide a significant advantage in their trading careers. It is for
the hands-on, realtime trader who wants to expand and learn, get an “edge” over
others, and do the best he can to succeed in his “bottom-line” goal of making
money in the markets.
We will borrow philosophies from other seemingly unrelated fields such as
martial arts and gambling. However, our intention is not to be philosophical or to
be the “Zen of trading.” It is merely provided to give examples of how new ways
of looking at things have worked successfully in other areas. Part philosophy,
part experience, part statistics, The Option Secret is different from any book you
have read in the past in both its innovative approaches and simplifying methods.
We must reemphasize several caveats that we mentioned in the front of this
book. First, there is risk of loss in all trading, no matter how attractive these
strategies may seem. We have tried to emphasize the best positions to use and
most opportune times to trade; however, even in these situations there is no
assurance that trading will be successful or profitable.
Second, the statement, “Past performance is not indicative of future results,”
suggests that although a particular strategy may have worked in the past,
circumstances change, and there are no assurances of similar results in the
future. Finally, as you will see in this book, there are significant benefits when
selling options, and therefore many of our strategies will involve selling puts and
calls. However, anytime a trader has a short position in an option, there is
unlimited risk of loss. Although we present our methods for taming this, this
potential still exists and must be taken into account by the trader with both
psychological and monetary considerations.
PLAIN ENGLISH VS. MATHEMATICAL FORMULAS
Most books written about options provide the appropriate definitions and
descriptions of option strategies and mathematics and theoretical formulas.
These scholarly approaches do little to answer the questions: “When should I use
(and not use) options?;” “Why is option volatility important?;” “How do I use
option volatility figures?;” “Which option strategies are the best (and why), and
when do I use them?” Instead of the formal, definitive, mathematical approach,
we present the practical, “hands-on” trading methods that we use in our own
trading.
There are several reasons we decided to do this. First, there are already many
good books (which we have listed in our bibliography) which include definitions
and mathematics; however, there are few that delve into the practical end.
Second, even the most deductive of our readers will have a difficult time
translating the masses of descriptive material into their own option trading plan.
It has taken us years of full time daily trading and research to get where we are.
We are presenting the deductions, conclusions and plans formulated from many
years of research and trading. We have learned what works and what doesn’t,
and there is no reason for our readers to have to experience the pain of using
inappropriate trades or strategies when they can be avoided.
FROM THESE YEARS OF RESEARCHING AND USING OPTION
VOLATILITY WE HAVE CATALOGED WHAT WE FEEL ARE THE MOST
SIGNIFICANT BENEFITS OF HIGH AND LOW OPTION VOLATILITY. WE
HAVE PUT THIS TO USE IN OUR ACTUAL REAL TIME TRADING. OUR
THEORIES HAVE ALL BEEN TESTED UNDER FIRE TO LET US KNOW
WHICH OPTION STRATEGIES ACTUALLY WORK AND WHICH DO
NOT; THE BEST TIMES TO USE THESE STRATEGIES (AND HOW NOT
TO ABUSE THEM); AND WHAT TO LOOK FOR IN THE FUTURE.
For readers requiring either the basics of options or in-depth mathematics and
explanations, we have included these in Section 3; (it is also available in the
books we have listed in our bibliography). However, the goal of this book is to
take the mysterious subject of option volatility which has always been
surrounded by formulas, Greek letters, statistics and confusion, and make it
easily usable to the advantage of all traders.