medowz
59 posts
msg #81534
- Ignore medowz |
10/22/2009 3:03:09 AM
Friends,
There's always two sides to the trading game as you may know, especially with options.
In Augen's book, The Volatility Edge in Options Trading, Augen tracks option volatility spikes in much the same manner as TheRumpledOne, tracks price action: statistically. That's his options angle according to his book, . He recommends a good understanding of the Greeks, especially Vega, before you start putting too much serious money into options. In short, if the VIX goes up, like it did today, then option prices in general go up, too. This is not to say that call prices won't decline. They will, but since volatility is a component of option pricing, it is factored into that decline. Obviously some options are not going to observe the rule, but in general they will. Just like in any market some stocks advance despite overall market conditions. The problem with LEAPS and long term options, according to Augen, is their exposure to Vega risk (VIX fluctuations). It's a matter of which side of the trading game you're on; options buyers or sellers. The idea of course as a buyer is to buy options that are cheap: maybe they sell on par with their historical vs their implied volatilities. If they're not cheap, in other words their implied volatilites are higher than their historical volatilities, then it is highly probable they will suffer from an ugly disease called "volatility crush" should one hold those options long term, the overall market rises and the VIX declines. As you may know the VIX is refered to as the "fear -greed index" by many. The VIX is generally inversely correlated to the S&P 500. If the S&P rises, the VIX delines: greed. If the S&P declines, the VIX rises: fear. Many people use options to manage risks, like insurance. Warren Buffet is one of the largest options players in the world because he uses them to manage risk. When the markets are advancing significantly, in theory greed runs rampant, the idea is that insurance is not that important and options offer a huge leverage. When the market is in decline, people are in fear of losing their gains and they want to protect those gains with insurance (puts). This is why it is quite possible to observe a particular stock price to increase moderately and it's option price to remain stable or decline slightly during market advances. Although time decay (theta) is an important factor in options pricing, Augen warns us not to ignore the important effects of volatility in option pricing. Augen wrote a very good options book and it may eventually become a classic. Most of his concepts are beyond the retail investor because, I think, few people have the tools and understanding to perform the statistical analysis involved in exploiting those concepts- me including.
FWIW.
Cheers,
mike
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