Trading Options in Turbulent Markets: Master Uncertainty through Active Volatility Management

Chapter 1. Managing Risk and Uncertainty with Options

Trading in the financial markets can be summarized by the phrase, "You just don't know what you don't know." On one hand, an investor can spend hours with research, due diligence, charts, and mathematical models only to end up with a worthless stock certificate, the result of a rare event that could not have been predicted. On the other hand, an investor can reap a bountiful reward on any stock, option, or future with less due diligence than that performed when purchasing a microwave oven. No charts or formulas involved—just plain profit resulting from old-fashioned intuition.

Today, the flow of information and the speed of its dissemination are simply astounding. In this age of electronic financial instruments, one can review information from a myriad of up-to-the-minute sources and subsequently amass a large trading position via a few clicks on the computer. Equally astounding is the sheer depth and liquidity of the exchange markets, where options are often quoted pennies wide and in multiple thousands on both the bid and offer. The markets have evolved from a disjointed fragmentation of phone calls and hand signals to a symphony of speed and synchronization.

Yet despite all the growth and development of the financial markets, there remains a great equalizer. Within the trading space there lies an element that is applicable equally to the eighteenth-century bourse trader, who anxiously awaited the latest information flow via ...