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The Option Trader's Guide to Probability, Volatility, and Timing
A comprehensive guide that lets you play the options game with confidence
Due to the uncontrollable elements associated with options, many traders find themselves without practical strategies for specific situations. The Option Trader's Guide to Probability, Volatility, and Timing offers traders a variety of strategies to trade options intelligently and confidently in any given situation. With detail and objectivity, this book sets forth risk assessment guidelines, explains risk curve analysis, discusses exit methods, and uncovers some of the biggest mistakes options traders make. The Option Trader's Guide provides readers with strategies for trading options as well as expert advice on when to implement those strategies.
Due to the uncontrollable elements associated with options, many traders find themselves without practical strategies for specific situations. The Option Trader's Guide to Probability, Volatility, and Timing offers traders a variety of strategies to trade options intelligently and confidently in any given situation. With detail and objectivity, this book sets forth risk assessment guidelines, explains risk curve analysis, discusses exit methods, and uncovers some of the biggest mistakes options traders make. The Option Trader's Guide provides readers with strategies for trading options as well as expert advice on when to implement those strategies.
- GenresFinance
271 pages, Hardcover
First published October 8, 2002
4 people want to read
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Displaying 1 of 1 review
February 5, 2023
Another week, another book on options trading. I think if I read a few more of these books, I can write one myself. The book hits all the familiar points in the familiar ways and adds a few "real world" experiences in these, which was a nice touch. Author put some real work in.
Regretfully, the book fails to deliver the goods touted in its title, viz. "The option trader's guide to probability, volatility, and timing." Sure, there is some talk about these three crucial elements of option trading, but no mathematical substance.
To go to the most egregious example, author states:
"It is possible to estimate the probability of profit for any given option trade by considering the volatility in price movement that a stock or futures contract has exhibited in the past."
and then goes on to give examples of some trades with a box labeled 'probability analysis' printed next to them. This box contains all the key probabilities involved, such as 'probability of reaching price X', and these are given WITHOUT ANY EXPLANATION HOW THESE NUMBERS WERE GENERATED. Or where these could be found; after all, we do not need to do the calcs ourselves if we can get them from some (public) source or neighborhood nerd.
I mean, sure, assuming stock prices follow a (geometric) random walk, and providing calculated values for the volatility and drift parameters for the price action in the last month say, and assuming that these parameters will not significantly change between now and the moment of option expiration, it is certainly possible to construct some probability distribution of the possible stock prices at expiration, from which the required probabilities can be calculated. But that is not a trivial exercise and it only works if non-trivial assumptions hold up. None of this kind of discussion can be had in this book, even less a glimpse of the math behind it. This is a pretty damning omission for a book with this rather grandiose title.
Author seems also a bit fuzzy about the meaning of volatility. He states for example that a if a stock price has a historic volatility of 30%, it means that its value "is likely to rise and fall within a range of plus or minus 30% within the following 12 months". Sure, yeah, but can't you be a bit more precise? In the preceding sentence, author explained that volatility is the standard deviation which means we know that author's "is likely" means "is 68.2% likely", provided quite a few assumptions about stock price development hold. Author then produces a chart (figure 6.1A) of 20-day historic volatility for IBM which shows that this measure jumps all over the chart from 18% to 80% inside a one-year time window, which should make us wonder how it can be believed that historic volatility provides a reliable prediction of the distribution of actual stock prices a year hence.
We don't have a crystal ball, we can't predict the future - and that is a great thing (remember the sad fate of the Cyclops!); however, we should be clear-headed about this fact and not bury it in homely pseudo-math.
Regretfully, the book fails to deliver the goods touted in its title, viz. "The option trader's guide to probability, volatility, and timing." Sure, there is some talk about these three crucial elements of option trading, but no mathematical substance.
To go to the most egregious example, author states:
"It is possible to estimate the probability of profit for any given option trade by considering the volatility in price movement that a stock or futures contract has exhibited in the past."
and then goes on to give examples of some trades with a box labeled 'probability analysis' printed next to them. This box contains all the key probabilities involved, such as 'probability of reaching price X', and these are given WITHOUT ANY EXPLANATION HOW THESE NUMBERS WERE GENERATED. Or where these could be found; after all, we do not need to do the calcs ourselves if we can get them from some (public) source or neighborhood nerd.
I mean, sure, assuming stock prices follow a (geometric) random walk, and providing calculated values for the volatility and drift parameters for the price action in the last month say, and assuming that these parameters will not significantly change between now and the moment of option expiration, it is certainly possible to construct some probability distribution of the possible stock prices at expiration, from which the required probabilities can be calculated. But that is not a trivial exercise and it only works if non-trivial assumptions hold up. None of this kind of discussion can be had in this book, even less a glimpse of the math behind it. This is a pretty damning omission for a book with this rather grandiose title.
Author seems also a bit fuzzy about the meaning of volatility. He states for example that a if a stock price has a historic volatility of 30%, it means that its value "is likely to rise and fall within a range of plus or minus 30% within the following 12 months". Sure, yeah, but can't you be a bit more precise? In the preceding sentence, author explained that volatility is the standard deviation which means we know that author's "is likely" means "is 68.2% likely", provided quite a few assumptions about stock price development hold. Author then produces a chart (figure 6.1A) of 20-day historic volatility for IBM which shows that this measure jumps all over the chart from 18% to 80% inside a one-year time window, which should make us wonder how it can be believed that historic volatility provides a reliable prediction of the distribution of actual stock prices a year hence.
We don't have a crystal ball, we can't predict the future - and that is a great thing (remember the sad fate of the Cyclops!); however, we should be clear-headed about this fact and not bury it in homely pseudo-math.
Displaying 1 of 1 review