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Thursday, December 28, 2006

Probability, Volatility & Timing

As mentioned in earlier post, I've recently read Jay Kaeppel's "The Option Trader's Guide to Probability, Volatility and Timing". Lately, I've been on a reading spree, lol, and I still have a couple more books on my to-read list.

I would divide his book into 2 main sections. The first section is on overview of uses for options, options basic and a chapter each devoted to Option Pricing, Time Decay, Volatility, Probability and Market Timing.

Jay is an advocate for buying ITM underpriced options (low relative IV), selling OTM overpriced options (high relative IV). And he talks a great deal about Volatility and Probability. I can't agree more with him that never doing anything but just buying cheap OTM options is a SURE way to lost money in options trading in the long run, which is why I usually buy ITM. I had some take-aways on relative volatility rank and IV skew. And for those of you who think that buying longer term options is a safe haven, think again. Do you know that changes in IV have a greater impact on prices of longer-term options than on shorter term options?

The next section of his book is all about trading strategies, with each chapter written on each one of them: backspread, long naked option, calendar spread, butterfly spread, long straddle, short vertical spread, short naked put and writing covered call. He explains the key factors in using each of these strategies, with risk curves and position management of these strategies. At the end of the book, there is also a summary table on what strategies to use under different conditions of volatility, delta, skew, timing and time to expiration.

All in all, this book is quite clearly written and hence ease of reading. Suitable for both new traders and intermediate traders.

Grade: B+

p/s: Does anyone know any website that provides free charts or data on relative volatility rank of stocks?


Blogger Zbee said...

try www.ivolatility.com or

12:35 PM  
Blogger Simply Options Trader said...

Zbee, thanks for the links. The optionstrategist link has some good (& free) stuff on overpriced /underpriced options.

3:17 PM  

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