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Trading Options in Turbulent Markets: Master Uncertainty through Active Volatility Management, 2nd Edition

Book Description

Top options expert Larry Shover returns to discuss how to interpret, and profit from, market volatility

Trading Options in Turbulent Markets, Second Edition skillfully explains the intricacies of options volatility and shows you how to use options to cope, and profit from, market turbulence. Throughout this new edition, options expert Larry Shover reveals how to use historical volatility to predict future volatility for a security and addresses how you can utilize that knowledge to make better trading decisions.

Along the way, he also defines the so-called Greeks—delta, vega, theta, and gamma—and explains what drives their values and their relationship to historic and implied volatility. Shover then provides effective strategies for trading options contracts in uncertain times, addressing the decision-making process and how to trade objectively in the face of unpredictable and irrational market moves.

  • Includes a new chapter of the VIX, more advanced material on volatility suitable for institutional or intermediate options trader, and additional volatility-based strategies

  • Answers complex questions such as: How does a trader know when to tolerate risk and How does a successful trader respond to adversity?

  • Provides a different perspective on a variety of options strategies, including covered calls, naked and married puts, collars, straddles, vertical spreads, calendar spreads, butterflies, condors, and more

As volatility becomes a greater focus of traders and investors, Trading Options in Turbulent Markets, Second Edition will become an important resource for in-depth insights, practical advice, and profitable strategies.

Table of Contents

  1. Cover
  2. Contents
  3. Title
  4. Copyright
  5. Dedication
  6. Preface
  7. Acknowledgments
  8. Introduction
  9. Part I: Understanding the Relationship between Market Turbulence and Option Volatility
    1. Chapter 1: Managing Risk and Uncertainty with Options
      1. What Is Risk?
      2. What Is Uncertainty?
      3. Seven Lessons Learned from Market Volatility
      4. Understanding Derivatives
      5. The Six Benefits of Options
    2. Chapter 2: Making Sense of Volatility in Options Trading
      1. Volatility as an Asset Class
      2. Analyzing Volatility with Implied Volatility
      3. What Does Implied Volatility Reveal?
      4. Making Trading Decisions Based on the Disparity between Historical and Implied Volatility
      5. Appreciating Volatility for All It Is Worth
      6. How Volatility Really Works on the Trading Floor
      7. Volatility and Uncertainty: Lessons for the Irrational Option Trader
      8. Varieties of Option Volatility Trading
    3. Chapter 3: Working with Volatility to Make Investment Decisions
      1. On Predicting the Future
      2. Starting with Historical Volatility
      3. Implied Volatility
      4. Why Do Volatilities Increase as Equities Fall?
      5. Implied versus Historical Volatility
      6. Justification for the Disparity between Historical and Implied Volatility
    4. Chapter 4: Volatility Skew: Smile or Smirk?
      1. Considering Some Examples
      2. A Primer on Random Walk and Normal Distribution
      3. Dealing with the Higher Moments of the Normal Distribution
      4. Skew Is High, Skew Is Low. So What?
      5. Does a “Flat” or “Steep” Skew Predict the Future?
      6. A Fair Warning about Thinking about Skew too Much
    5. Chapter 5: Fixated on Volatility and the VIX
      1. What We (Think) We Know
      2. Definitions of VIX
      3. Grasping the VIX Index
      4. VIX—A (Very) Brief History
      5. VIX: Calculation and Interpretation with a Simple Calculator
      6. Important Insights on the VIX Index
      7. What Does the VIX Tell Us?
      8. VIX and Perhaps the Biggest Misnomer of All!
  10. Part II: Understanding Option Volatility and Its Relationship to Option Greeks, Personal Decision Making, and Odds Creation
    1. Chapter 6: Extreme Volatility and Option Delta
      1. The Misnomer of Delta and Probability of Exercise
      2. Delta Defined
      3. The Relationship Between Volatility and Delta
      4. Higher Volatility and Delta
      5. Lower Volatility and Delta
      6. Delta, Time, and Volatility
      7. Delta, Position Delta, Volatility, and the Professional Trader
    2. Chapter 7: Smoke and Mirrors: Managing Gamma through Volatile Markets
      1. Gamma and Volatility
      2. Managing Positive Gamma during a High-Volatility Environment
      3. The Bad News: There’s Always More than Meets the Eye
      4. Practical Considerations for Managing Long Gamma in a High-Volatility Environment
      5. Managing Negative Gamma in a High-Volatility Environment
      6. Practical Considerations of Negative Gamma in High Volatility
      7. Gamma and Volatility with Respect to Time Structure
      8. Summary
    3. Chapter 8: Price Explosion: Volatility and Option Vega
      1. The Relationship between Implied Volatility and Vega
      2. Implied Volatility: Price Analogy
      3. Option Vega and Time
      4. Option Vega and Its Greek Cousins
      5. Option Vega Implications
      6. Don’t Underestimate the Relationship between Volatility and Option Vega
      7. Volatility and Vega Insensitivity
      8. Important Concepts When Applying Option Vega in a Volatile Marketplace
      9. Summary
    4. Chapter 9: Sand in the Hourglass: Volatility and Option Theta
      1. Balancing Time Decay with Volatility: Mistakes Traders Make
      2. Volatility and Theta: What Every Investor Needs to Know
    5. Chapter 10: The Nuances of Volatility
      1. The Complication Surrounding Vega Risk in an Option Position
      2. Implied Volatility Skew + Term Structure = Volatility Surface
      3. Implied Volatility Term Structure
      4. Did You Know Your Volatility Has Volatility?
      5. The Normal Value of Volatility
  11. Part III: Ten Proven Strategies to Employ in Uncertain Times
    1. Chapter 11: Preparing for Trading Using Volatility Strategies
      1. The Elements of a Sound Trading Decision
      2. Developing an Approach to Options Trading
      3. The Mind of a Successful Trader
      4. Decision Making, Options versus Everything Else
    2. Chapter 12: The Buy-Write, or the Covered Call
      1. The Buy-Write (Covered Call) Defined
      2. An Example of the Covered Call Strategy
      3. The Theory and Reality of the Covered Call
      4. Covered Call Writing and Implied Volatility
      5. Implied Volatility in Practice
      6. Managing Contracts in a Time of High Volatility or a Falling Market
      7. Effective Call Writing in a Volatile Market
    3. Chapter 13: Covering the Naked Put
      1. Contemplating the Cash-Secured Put
      2. Utilizing the Cash-Secured Put in a High-Volatility Environment
      3. Cash-Secured Put and Volatility: Risks and Consequences
      4. Income Strategy: Volatility as an Asset Class and Cash-Secured Puts
      5. Position Management
    4. Chapter 14: The Married Put: Protecting Your Profit
      1. Volatility, Downside Risk, and the Case for Portfolio Insurance
      2. Why Buy High Volatility?
      3. The Married Put
      4. How and When to Use a Married Put
      5. Example of When to Use a Married Put
      6. The Married Put: Limiting Loss, Neutralizing Volatility, and Unleashing Upside Potential
      7. Married Put: A Real-Life Illustration
    5. Chapter 15: The Collar: Sleep at Night
      1. Collar Strategy
      2. Types of Collars
      3. Summary
      4. Conclusions on the Collar Strategy
    6. Chapter 16: The Straddle and Strangle: The Risks and Rewards of Volatility-Sensitive Strategies
      1. The Buying or Selling of Premium
      2. Properties of Straddles and Strangles
      3. Comparing Straddles and Strangles
      4. How to Compare Historical and Implied Volatility
      5. The Impact of Correlation and Implied Volatility Skew
      6. An Alternative to the Naked Volatility Sale via the Straddle/Strangle: The Strangle Swap
    7. Chapter 17: The Vertical Spread and Volatility
      1. Introduction to the Vertical Spread
      2. A Trader’s Reasoning for Trading a Vertical Spread
      3. Designing Your Vertical Spread
      4. Vertical Spreads and Greek Exposure
      5. Vertical Spreads as a Pure Volatility Play
      6. Comparing Volatility’s Effect on Vertical Spreads
      7. Summary: Comparing Vertical Spreads and Implied Volatility
    8. Chapter 18: Calendar Spreads: Trading Theta and Vega
      1. Calendar Spreading—Trading Time
      2. Risks and Rewards of the Calendar Spread
      3. A Calendar Spread with a Bullish Expectation
      4. Considerations and Observations for Calendar Spreads and Volatility
    9. Chapter 19: Ratio Spreading: Trading Objectives Tailor Made
      1. How Back Spreads and Ratio Spreads Work
      2. Back Spreads
      3. Ratio Spreads
      4. Greek Values and the Back Spread or Ratio Spread
      5. Configuring and Pricing a Back Spread or Ratio Spread
      6. Reconciling Volatility and the Back Spread or Ratio Spread
    10. Chapter 20: The Butterfly Spread
      1. Setting up a Butterfly
      2. The Butterfly Spread as a Volatility Investment
      3. Greek Values and the Butterfly
      4. Structuring and Pricing a Butterfly
      5. Trading Butterflies in a Volatile Market
    11. Chapter 21: Wingspreads
      1. Capturing Convergence and Divergence
      2. Wingspreads: Risk/Reward
      3. Wingspreads: Sensitivities
      4. Wingspreads and the Greeks
      5. Wingspreads: Various and Sundry Details
      6. The Condor Spread
      7. Conclusion
  12. About the Author
  13. Index