Preface
For those of you who don't know, Adam Warner writes the excellent and
influential blog Daily
Options Report. I began reading his writing when he co-wrote the
options column on Street Insight (part of the TheStreet.com family) from spring 2003 to
spring 2005. He is currently Options Editor at Minyanville.com. You can read his
profile at his About
on his blog.
Readers should know that I correspond occasionally with Adam Warner and
that I respect him. I have learned a tremendous amount from his articles
and from his answers to my questions. Moreover, I admired his warning
readers that they might wish to exercise caution when following Lenny
Dykstra's options articles on The Street.com. His warnings
were long before Dystra's problems became fodder for the mass media,
including CNBC. Adam is a friend and thus some might consider my book
review biased.
Overall Summary
I use options in my trading and investing. However, I am not a
sophisticated options trader who rebalances his delta hedge on an hourly
or daily basis. Instead, I tend to use options to profit from the view I
have of the markets or a stock.
As part of my on-going learning, I do read about options on websites,
newspapers, and blogs. I read about options traders taking advantage of
gamma, and, although I had a sense of what they were doing, I was never
clear. After reading Adam Warner's book
Options Volatility Trading: Strategies for Profiting from Market
Swings
, I have a solid
understanding.
I thoroughly enjoyed this book because it was like having a conversation
with Adam, where he gave me a tutorial on how he thinks about options and
how he trades them. He could easily have used complex mathematics, charts
and diagrams, overly complex strategies to confuse most readers. Instead,
he chose a conversational tone with sufficient material that most options
readers would readily understand.
If you are brand new to options, this book might not be the proper entry
point. Instead, you might wish to view the learning tutorials
covered by Options News Network, an online site dedicated to, surprise,
options.
If, however, you have a reasonable understanding of options, then you
will find this book invaluable. By reasonable understanding of options,
you know what a put and a call are and can describe them. Moreover, you
have a rough idea of the Greeks, though Warner does provide a quick
snapshot of the Greeks in his book. You don't require a strong or
thorough understanding, just a reasonable understanding, to benefit from
reading this book.
As fair warning, I did read some sections slowly and more than once.
However, when I learn new material, I often read sections slowly and more
than once. I learn better using this technique.
After reading Warner's book, I am much more comfortable in reading
options articles. For example, when authors talk about the VIX, I am
knowledgeable about the VIX, how it works, how to interpret it, and its
shortcomings. I have a better appreciation of which options strategies to
employ when.
Now that I have read this book, do I plan to become an aggressive options
trader? I do not think so. Will I use strategies discussed in this book
to enhance my returns? Yes, absolutely.
Is this book a worthwhile investment? Yes, most definitely. Even if the
only benefit you derive is being able to understand options articles
better than you did before, the book is a worthwhile investment. My
knowledge is much stronger than it was before. And, I know that will
profit from the knowledge and strategies discussed in the book.
I highly recommend
Options Volatility Trading: Strategies for Profiting from Market
Swings—Five Stars.
Introduction
Adam Warner sets out the tone of the book where he explains that he will
focus on volatility and the VIX. You will learn how to measure volatility
or how to manage an active account or an investment portfolio with an
ever-changing set of backdrop conditions.
Chapter 1: Who Am I? Why Am I Here?
From August 1988 until the 2000 timeframe, Warner worked as a Market
Maker on the floor of the Amex Options Exchange. He describes his
experiences and how the Amex changed during his tenure. My most important
take-away is that Warner had to think quickly on his feet. Thus, through
his experiences, he not only understood the technical aspects, but also
gained an intuitive feel. I like that the author has achieved a wealth of
knowledge and confidence.
Chapter 2: Know Your Greeks
Warner provides a quick high-level tutorial on the options Greeks. If you
are looking for a thorough, rigorous text discussing the intricacies of
the Greeks, then you'll need to consult other texts. His purpose in this
chapter is to ensure that you have sufficient knowledge to understand the
rest of the text.
As part of his quick overview, he teaches you how to think about your
position sizing by using delta. That is, convert your option exposure
through delta into a stock position. Given your portfolio, is your option
size reasonable? While options can employ leverage to positive effect,
they can, if you are not careful or have a string of poor luck, destroy
your portfolio. He cautions readers to ensure that their positions are
not outsized for their portfolios.
Here's a mental model that helped me:
- Delta - Useful for sizing and judging risk exposure.
- Theta - The slope on a hill while driving or biking. Either it is a
positive force driving forward or it is a negative force that you need to
overcome through trading.
- Gamma - Represents the energy or power. If I have lots of gamma at my
disposal, I can more readily overcome theta.
Chapter 3: Understanding the VIX
Warner provides a high level overview of the VIX. As part of his
overview, he instructs you on how you should view and make sense of
iVolatility.com historical and implied volatilities. He also provides
some historical contexts and provides some quirks with the VIX.
Chapter 4: Nuts and Bolts VIX
This chapter picks up from the last and provides more detail. Warner
teaches you how to interpret the VIX in that it provides an expectation,
not a guarantee of future price movement. Moreover, market volatility
expectations are formed from the volatility of individual stocks and
their correlation.
Chapter 5: Volatility Timing
Not all days are created and not all months are created equal. Warner
uses historical analysis to help guide you when it is usually better to
buy and sell options.
Chapter 6: How Do Traders Trade Volatility
In general, net selling options at a higher volatility and net buying
options at a lower volatility than they ultimately realize is profitable.
However, active trading is often required. Warner discusses how often you
should rebalance your delta hedge among other considerations.
Because of my style of trading options is so much different from Warner's
volatility style, I found this chapter particularly rewarding and
helpful.
Chapter 7: Options and the Quarterly Earnings Report
Often you hear analysts say, "Stock ABCD is expected to move X%, either
up or down, after the bell when it releases its earnings."
This chapter teaches you how you can determine for yourself how much the
stock is expected to move. This knowledge is helpful whether you are an
option or stock trader. If your expectations are different from that of
the market, you can play accordingly. But, as Warner mentions, you have
to be prepared to defend your position and take your medicine when the
markets surprise you.
Chapter 8: Like the Weather--The Trader VIX and Why It Doesn't Do
What You Think It Does
For those that don't understand them well, VIX, VIX futures, VIX Options
on Futures, and VIX ETNs are complex and confusing. After reading this
chapter, I have a clear understanding of how these instruments work.
Consequently, I will take Warner's advice not to use them. Instead, as he
suggests, I will keep it simple by using a different set of common
indexes and ETFs.
With all the discussion in the media about VIX and fear index and how
people might want to protect themselves against volatility, investors and
traders should understand VIX. I suspect a surprising number do not.
Chapter 9: Ratio, Ratio
Put call ratios should be interpreted and used with caution, especially
for individual stocks. By themselves, they could indicate any number of
scenarios, and for you the trader, it is often difficult, if not
impossible, to understand which scenario is at play.
Chapter 10: We're (Pin) Jammin'
Warner discusses the circumstances that make pins more likely. A pin is
where a stock expires at a strike price. If you knew in advance where a
stock would be pinned, then you could profit from this knowledge.
Chapter 11: Myth-Busting and Other Assorted Options- and
Expiration-Related Stats
There are several urban legends related options and options expiry.
Warner examines a few of them and provides you with his analysis. For
example, we often hear that expiration week is more volatile? Is that
true, and if so, how can you profit from it?
Chapter 12: Buy-Write--You Bet
I found this chapter surprising because the results were exactly counter
to my expectations. A buy-write is when an investor or trader buys a
stock and sells a call. The call provides extra income while limiting
potential capital gains. Under what circumstance is it advantageous to
engage in buy-writes?
Chapter 13: Strategy Room
This is a great chapter because Warner provides his thoughts and analysis
on some common strategies such as:
- Naked Put;
- Bull Call Spread;
- Bear Put Spread;
- Backspreads;
- Calendar Call Spread;
- Backspread and Calendar Spread Combined;
- Butterfly Spread;
- Iron Butterfly;
- Condor;
- Iron Condor;
- Synthetics; and
- Dividend Plays.
Armed with this knowledge, you are better equipped to think about which
strategies you want to employ under various circumstances.
Chapter 14: Ultra and Inverse ETFs
I found this chapter surprising, because even though I am well versed in
how double and triple exchange traded funds (ETFs) work, I didn't realize
the size and scope of some of these ETFs. If you don't understand how
ultra and inverse ETFs grind your results down over time, you definitely
need read and understand this chapter. And perhaps you'll be surprised
too at how important these ultra and inverse ETFs have become to the
markets.
Chapter 15: Chartin' Them Derivatives
Many investors have profited by using technical analysis. In this
chapter, Warner cautions traders not to employ the same methodology to
derivatives. Under certain circumstances, it might provide some
additional guidance around the edges.
Chapter 16: Plus Ticks and Other Rules
The key theme in this chapter is that you must trade the market you're
given, not the market you would like it to be. Whether you agree with the
plus tick rule for shorting stocks is irrelevant. Trade the market with
rules as they exist.
Disclosure: As part of the Amazon Associate program, I receive
remuneration for each book sold by clicking on the Amazon.com links in my
article.
On Thursday, 4 June 2009, I photographed
Ana Avramovic at Heritage Park in Calgary Alberta. If you click on
my Flickr profile
link, you will be taken to Flickr where you can see more of my
pictures.
), who served as
Chairman of the Federal Reserve of the United States from 1987 to 2006.
Because of the Fed's prior and current policies and actions, Fleckenstein
has been and remains bullish on precious metals and some mining
companies. Please note that he is a director of Pan American Silver.
, stressed that it is
often better to buy the actual underlying commodity rather than a mining
company. His rationale is that when you invest in a company, you then
have to worry about such things as management, confiscation through
rising royalties and taxes, environmental regulations, increased labor
costs, increased energy and other input costs, political disruptions and
many other similar factors. These problems sometimes cause a company's
share price to underperform the price of actual commodity itself. When
compared against Pan American Silver's share price over the past two
years, 
