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Trading Options at Expiration: Strategies and Models for Winning the Endgame Hardcover – January 1, 2009
Equity and index options expire on the third Friday of each month. As that moment approaches, unusual market forces create option price distortions, rarely understood by most investors. These distortions give rise to outstanding trading opportunities with enormous profit potential. In Trading Options at Expiration: Strategies and Models for Winning the Endgame, leading options trader Jeff Augen explores this extraordinary opportunity with never-before published statistical models, minute-by-minute pricing analysis, and optimized trading strategies that regularly deliver returns of 40%-300% per trade.
Youll learn how to structure positions that profit from end-of-contract price distortions with remarkably low risk. These strategies dont rely on your ability to pick stocks or predict market direction and they only require one or two days of market exposure per month. Augen also discusses:
· Three powerful end-of-cycle effects not comprehended by contemporary pricing models
· Trading only one or two days each month and avoiding overnight exposure
· Leveraging the surprising power of expiration-day pricing dynamics
If youre looking for an innovative new way to reignite your returns no matter where the markets move, youve found it in Trading Options at Expiration.
Learn and profit from Jeff Augens book: It clearly explains how to take advantage of market inefficiencies in collapsing implied volatility, effects of strike price, and time decay. A must-read for individuals who are options oriented.
--Ralph J. Acampora, CMT, Director of Technical Analysis Studies, New York Institute of Finance
A fantastic, insightful book full of meticulously compiled statistics about anomalies that surround option expiration. Not only does Augen present a set of effective trading strategies to capitalize on these anomalies, he walks through the performance of each across several expirations. His advice is practical and readily applicable: He outlines common pitfalls, gives guidance on timing your executions, and even includes code that can be used to perform the same calculations he does in the text. A thoroughly enjoyable read that will give you a true edge in your option trading.
--Alexis Goldstein, Vice President, Equity Derivatives Business Analyst
Mr. Augen makes a careful and systematic study of option prices at expiration. His translation of price behavior into trading strategy is intriguing work, and the level of detail is impressive.
--Dr. Robert Jennings, Professor of Finance, Indiana University Kelly School of Business
This book fills a gap in the vast amount of literature on derivatives trading and stands out for being extremely well written, clear, concise, and very low on jargon--perfect for traders looking to evolve their equity option strategies.
--Nazzaro Angelini, Principal, Spearpoint Capital
Instead of considering macro-time strategies that take weeks to unfold, Jeff Augen is thinking micro here--hours or days--specifically the days or hours right before expiration, and harnessing grinding, remorseless options decay for profit. He builds a compelling case for the strategy here. The concept of using ratio spreads plus risk management for as brief a period as one day--open to close--to capture expiring premium is worth the price of admi
- Print length159 pages
- LanguageEnglish
- PublisherFt Pr
- Publication dateJanuary 1, 2009
- Dimensions5.75 x 0.75 x 8.5 inches
- ISBN-100135058724
- ISBN-13978-0135058725
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Editorial Reviews
About the Author
Jeff Augen, currently a private investor and writer, has spent over a decade building a unique intellectual property portfolio of databases, algorithms, and associated software for technical analysis of derivatives prices. His work, which includes more than a million lines of computer code, is particularly focused on the identification of subtle anomalies and price distortions.
Augen has a 25-year history in information technology. As a cofounding executive of IBMs Life Sciences Computing business, he defined a growth strategy that resulted in $1.2 billion of new revenue and managed a large portfolio of venture capital investments. From 2002 to 2005, Augen was President and CEO of TurboWorx Inc., a technical computing software company founded by the chairman of the Department of Computer Science at Yale University. He is the author of three previous books: The Option Traders Workbook (FT Press 2008), The Volatility Edge in Options Trading (FT Press 2008) and Bioinformatics in the Post-Genomic Era (Addison-Wesley 2005).
Much of his current work on option pricing is built around algorithms for predicting molecular structures that he developed many years ago as a graduate student in biochemistry.
Excerpt. © Reprinted by permission. All rights reserved.
Praise Quotes
“Learn and profit from Jeff Augen’s book: It clearly explains how to take advantage of market inefficiencies in collapsing implied volatility, effects of strike price, and time decay. A must-read for individuals who are options oriented.”
—Ralph J. Acampora, CMT, Director of Technical Analysis Studies,
New York Institute of Finance
“A fantastic, insightful book full of meticulously compiled statistics about anomalies that surround option expiration. Not only does Augen present a set of effective trading strategies to capitalize on these anomalies, he walks through the performance of each across several expirations. His advice is practical and readily applicable: He outlines common pitfalls, gives guidance on timing your executions, and even includes code that can be used to perform the same calculations he does in the text. A thoroughly enjoyable read that will give you a true edge in your option trading.”
—Alexis Goldstein, Vice President, Equity Derivatives Business Analyst
“Mr. Augen makes a careful and systematic study of option prices at expiration. His translation of price behavior into trading strategy is intriguing work, and the level of detail is impressive.”
—Dr. Robert Jennings, Professor of Finance, Indiana University
Kelly School of Business
“This book fills a gap in the vast amount of literature on derivatives trading and stands out for being extremely well written, clear, concise, and very low on jargon—perfect for traders looking to evolve their equity option strategies.”
—Nazzaro Angelini, Principal, Spearpoint Capital
“Instead of considering macro-time strategies that take weeks to unfold, Jeff Augen is thinking micro here—hours or days—specifically the days or hours right before expiration, and harnessing grinding, remorseless options decay for profit. He builds a compelling case for the strategy here. The concept of using ratio spreads plus risk management for as brief a period as one day—open to close—to capture expiring premium is worth the price of admission alone. A superb follow-up to his first book. Must-read for the serious options student.”
—John A. Sarkett, Option Wizard® software
Introduction and Explanatory Notes
Timing
This book was written during one of the most turbulent times in stock market history—the second half of 2008. During this time frame, trillions of dollars were lost by both bulls and bears as the world’s financial markets “melted down.” Investors who have never experienced a crashing market often believe that it is easy to generate profits in this environment with short positions. Unfortunately, nothing is ever that simple. The 2008 collapse included single-day bear market rallies as large as 11%—large enough to destroy nearly any short position. The answer lies in reducing market exposure and trading only when it makes sense.
Far too many investors have taken the opposite approach by remaining in the market with a portfolio of investments whether they were winning or losing. This approach has its own familiar vocabulary built around terms such as value investing and diversification. It hasn’t worked well for most investors. At the time of this writing, U.S. equity markets had just plunged to their 1997 levels, erasing 11 years of gains. Subtracting an additional 30% for inflation and dollar devaluation paints an even darker, but more realistic picture. As a group, long-term stock investors collectively lost an enormous amount of money—trillions of dollars.
Commodity traders faced similar problems. Oil prices climbed steeply from $27 in January 2004 to $134 in July 2008 before falling back to $50 in November. Long-term bulls actually suffered two significant setbacks during this time frame because the price fluctuated from an interim high of $70 in August 2006 to a low of $45 just five months later. Figure I.1 traces the price from January 2004 through the November 2008 decline.
As always, timing is everything. But the more important lesson is that blindly hanging on with a bullish or bearish view is a flawed strategy. Every investment has a window of opportunity; unless that window can be identified, leaving the money invested is somewhat like gambling. That said, the window can be relatively long—sometimes spanning months or years.
Option trading in turbulent times can also be difficult. Implied volatilities rise sharply, making simple long put or call positions unreasonably expensive, and the risks associated with naked short positions is simply too large for any conservative investor. Structured positions such as calendar spreads, ratios, vertical spreads, and the like, are difficult to trade because stocks frequently cross several strike prices in a single month—sometimes in both directions.
Figure I.1 Weekly U.S. spot price for crude oil 2004/01/02 to 2008/11/14. Price is displayed on the y-axis, key dates are noted on the chart. Source: U.S. Department of Energy, Energy Information Agency, http://www.eia.doe.gov.
These pitfalls can all be avoided by entering the market at very specific times and structuring trades that capitalize on well-characterized pricing anomalies. For option traders, the days preceding expiration represent the very best opportunity. During this time frame, traditional approaches to calculating the value of an option contract fail, and prices become distorted. One of the most significant forces, implied volatility collapse, can generate price distortions as large as 30% on expiration Thursday and 100% on Friday for at-the-money options. At the same time, strike price effects resemble the gravitational pull of planets, with stocks as their satellites. Heavily traded optionable stocks tend to hover around strike prices as large institutional investors unwind complex positions ahead of expiration. Option traders who structure day trades that take advantage of these forces can generate more profit in one day than most experienced investors realize in an entire month—sometimes an entire year.
Unlike other trading strategies that are linked—sometimes in subtle ways—to a specific set of market conditions, expiration trading focuses only on the underlying mathematics. It does not rely on any financial predictions, company results, or market direction. In this context, an expiration trader manages ticker symbols and strike prices because the name or business of the underlying stock is irrelevant. But nothing worth doing is ever easy. Trading subtle price distortions in the options market is a complex affair that requires an unusual blend of pricing knowledge and day trading skill. Expiration trading is a mathematical game distinctly different from stock picking. It will most likely appeal to day traders and other investors seeking to moderate risk by reducing market exposure. That said, this book should never be placed in the “get rich quick” section of the bookstore because success requires hard work, focused attention, and practice.
Some Notes About the Data
A relatively large amount of minute-by-minute stock and option data was used in the preparation of this book. This information, in its unprocessed form, was purchased from Tick Data of Great Falls, Virginia. Many specific criteria went into the decision to choose this particular data source.
First, and most significant, was accuracy. Because slight discrepancies can cause significant errors in implied volatility calculations, it is important that the data be both accurate and complete. Assembling complete and accurate datasets is not a trivial exercise, as options trade on several different exchanges, often at low liquidity levels. It is, therefore, necessary that the data vendor precisely align timestamps for the individual trades before creating a single sequence or time series. In addition, the large number of strike price and expiration date combinations adds a level of complexity that becomes apparent when a new series is introduced or a stock splits. This situation is further complicated by the enormous number of symbols used and reused by the options market. When creating data files of option prices, it is, therefore, crucial that old and new data or data from different equities not be mistakenly commingled despite the presence of overlapping symbols. In this regard, it is not unusual for a single stock in a given year to have more than 1,200 strike price/expiration date combinations. Multiplying by the number of stocks and years yields a very large number of permutations.
File format is another important criterion. Individual files should contain text delimited by commas, spaces, or some other readily identifiable marker so that the information can be imported into a database or spreadsheet. Filenames should follow a consistent set of conventions that make it simple to identify a particular series. For example, trade data for the Apple Computer $170 strike price call expiring on 2010/01/16 and having the symbol WAA_AN might be stored in a file designated WAA_C_20100116_170.00_AN. This file can easily be found using Excel’s import feature by searching for the concatenated expiration strike (20100116_170). The search will yield just two files, one containing call data, and the other containing put data (the put file would be designated WAA_P_20100116_170.00_MN). In this way, simple file-retrieval functions found in Microsoft Office products can be used to retrieve an individual option series from tens of thousands, and the collection of files effectively becomes a database.
Tick Data files were named as described above, and the information was provided as simple comma-delimited text. The data was clean in the sense that series designations were consistent and anomalies that made no sense were removed. In this context, the term anomalies refers to trades that were made in error—an option purchased for $125 rather than $1.25. Furthermore, time series used in the book were spot checked by calculating implied volatilities across multiple strike prices contained in different files. No inconsistencies were found in any of the Tick Data information. Readers who decide to purchase their own data are encouraged to apply the same level of scrutiny before selecting a vendor.
Working with Minute-by-Minute Data
Expiration trading provides enormous opportunities that scale with the amount of time and effort an investor is willing to spend. It is certainly reasonable to study options expiration by observing the behavior of individual stocks, and to profitably trade the opportunity using principles outlined in these pages. That approach represents one end of the spectrum. The other end involves the development of custom databases and software. Although most investors are probably not inclined to build their own databases, many will discover that much of the statistical analysis mentioned in these pages can be compiled with little effort and no programming using the capabilities of Microsoft Excel. Following are a few simple examples.
The first, and probably most relevant for the present discussion, is the determination of the nearest strike for each closing price. This value can be determined for stocks having $5 spacing using Excel’s rounding function, as follows:
Strike = (ROUND (Close /5)) *5Assuming that each line of the spreadsheet contains data for a single minute, the formula can simply be pasted down a column of the sheet to create a running list of nearest strikes. Adding another column that calculates the difference between strike and closing prices takes just a few moments. The calculation would use the absolute value function:
Difference = ABS (Strike – Close)Extending this operation with a simple conditional if/then statement enables us to determine the number of minutes where the closing price was more than $2 from the strike price. The following statement marks rows that exceed the $2 threshold with the number 1:
If (ABS (Strike – Close) > 2, 1,””)As before, pasting the formula down the spreadsheet automatically marks all appropriate rows. Summing the results and dividing by the number of minutes (rows) gives the percentage chance of any minute closing more than $2 from a strike.
Finally, we can execute more powerful conditionals without adding much complexity using Excel’s AND, OR, and NOT functions. Marking and counting the number of minutes containing a strike cross can be accomplished as follows:
If (AND (High>Strike, LowAs before, summing the column yields the total number of minutes meeting the criterion—in this case, a strike price cross. The design assumes that only one strike price will be crossed in a single minute—an assumption that turns out to be true virtually 100% of the time. More complex logical structures can be designed for situations where a single record can contain multiple strike price crosses; the general case, designed for any length record, is best deployed as part of a program linked to a database. A fully functional example written in Excel VBA is listed in Appendix 1, “Excel VBA Program for Counting Strike Price Crosses.”
These examples represent only a tiny fraction of the statistical queries that can be constructed in just a few minutes using minute-by-minute data imported into a spreadsheet. Surprisingly, this capability is relatively new; older versions of Excel (pre-2007) were limited to approximately 65,000 rows per worksheet—less than a single year of minute-by-minute data. Before the introduction of Office 2007, large amounts of information could be managed only by using a database and custom software. The combination of fast multiprocessing desktop computers and large-capacity spreadsheets now makes it reasonable for nearly anyone to purchase and analyze very large datasets. Current Excel worksheets can handle more than 1 million rows and 16,000 columns.
Ambitious investors with programming experience will want to take the next step by constructing databases and writing custom software. The information used throughout this book was stored in a database constructed with Microsoft SQL Server. The complete database contains millions of records along with custom programs and SQL queries. Despite its complexity, none of the work is beyond the capabilities of a determined investor with a desktop PC and Microsoft Office software. Furthermore, single-user versions of Oracle and IBM DB2 databases are also available for free download from company websites. These “developer” versions are very powerful and can be expanded to full corporate licenses with unlimited storage capacity and advanced security features.
Additional Notes Regarding Collateral Requirements and Pattern Day Trading Rules
Many of the trades described in these pages are structured as ratios where a certain number of options are purchased at one strike price and a larger number sold at a more distant strike. For example, a call ratio spread consisting of 10 long $95 calls and 20 short $100 calls would be referred to as a 1:2 call ratio. Many of our discussions use a larger ratio—most typically 1:3. Each of these trades has a naked short component because more options are sold than bought. The naked short component has a collateral requirement equal to 100% of the option proceeds plus 20% of the underlying security value minus the amount that the option is out-of-the-money. For $105 strike price calls costing $2.50 on a stock trading at $97, the calculation for a single contract would be as follows:
Option proceeds
100 ¥ $2.50 =
$250
Underlying stock
20% ¥ 100 ¥ $97 =
1,940
Out-of-the-money adjustment
($105 – $97) ¥ 100 =
(800)
Total
1,390
Because the adjustment for out-of-the-money options can be very large, a minimum of 100% of the option proceeds plus 10% of the underlying security value applies. Throughout the book when profits are mentioned, they are measured against the value of the original position, and collateral requirements are not included. For example, if a trade is long $5,000 of options and short $4,000, then the initial net cost of the trade is just $1,000. If the trade is ultimately closed for $1,500, the gain is considered to be $500 or 50%. Critics will rightfully point out that the return should be calculated using the collateral cost because this money must be present in the account while the trade is open. I have intentionally avoided this comparison because collateral requirements vary between brokers for different customer accounts.1 In addition, for customers who are able to take advantage of portfolio margining, the requirement for a particular trade depends on other positions in the account. It is generally a good idea to understand the collateral requirements for your own account, and to keep these in mind when placing short trades.
One additional requirement to keep in mind is the SEC 2520 Pattern Day Trader rule, which requires day traders to maintain account balances of at least $25,000. In this regard, the term pattern day trader refers to an investor who executes four or more “round-trip” day trades within five business days. The strategies outlined in this book are, therefore, not appropriate for accounts smaller than $25,000 because they involve opening and closing the same position during a single trading session.
Endnotes
- Recent changes allow customers whose accounts exceed certain minimum thresholds to take advantage of portfolio margining rules that more precisely align collateral requirements with overall portfolio risk. Readers wanting to further explore margin and collateral requirements are encouraged to visit the Chicago Board Options Exchange website and to contact their broker.
© Copyright Pearson Education. All rights reserved.
Product details
- Publisher : Ft Pr; 1st edition (January 1, 2009)
- Language : English
- Hardcover : 159 pages
- ISBN-10 : 0135058724
- ISBN-13 : 978-0135058725
- Item Weight : 10.5 ounces
- Dimensions : 5.75 x 0.75 x 8.5 inches
- Best Sellers Rank: #793,646 in Books (See Top 100 in Books)
- #379 in Options Trading (Books)
- Customer Reviews:
About the author

Jeff Augen, currently a private investor and writer, has spent more than a decade building a unique intellectual property portfolio of algorithms and software for technical analysis of derivatives prices. His work includes more than one million lines of computer code reflecting powerful new strategies for trading options, futures, and currencies in markets dominated by high frequency trading (HFT). As a result, he now provides real-time access to an unusual blend of market insight, trading strategies, and proprietary trading tools through his own service at PhaseTraderIndicator.com. Members of the service receive access to weekly in-depth Market Reviews and live Webinars as well as the PhaseTrader® Indicator tool suite. For more information about Jeff’s service please visit https://phasetraderindicator.com/visitors-center/ .
Augen has a 30-year history in information technology. As co-founding executive of IBM's Life Sciences Computing business, he defined a growth strategy that resulted in $1.2 billion of new revenue, and managed a large portfolio of venture capital investments. From 2002 to 2005, Augen was President and CEO of TurboWorx, Inc., a technical computing software company founded by the chairman of the Department of Computer Science at Yale University. He is author of The Volatility Edge in Options Trading (FT Press, 2008), The Option Trader's Workbook (FT Press, 2008), Trading Options at Expirations (FT Press, 2009), Day Trading Options (FT Press, 2009), and Bioinformatics in the Post-Genomic Era (Addison-Wesley, 2004). Much of his current work on derivatives pricing is built on algorithms for predicting molecular structures that he developed as a graduate student.
Customer reviews
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Learn more how customers reviews work on AmazonCustomers say
Customers find the book provides valuable insights and strategies for option trading. They describe it as an interesting read and worth the effort. Many readers mention that the book explains option pricing behavior in the days leading up to expiration. However, opinions differ on the language - some find it clear and straightforward, while others find it difficult to understand or digest due to the large amount of details.
AI-generated from the text of customer reviews
Customers find the book provides great insights for option traders. They appreciate the well-written strategies and details on how implied volatility collapses. The strategies are explained with solid examples. While some readers found the content academically interesting, others felt it was not practical.
"The Bottom Line: After reading this book, I was able to learn a few new things, incorporate them into my trading, generate more winning trades, and..." Read more
"This is a great book for providing the details on how implied volatility collapses on option expiration day...." Read more
"...willing to become your own trader, this book is bound to save you an awful lot of research and make you look forward to the next expiration week as..." Read more
"...Now, the caveats. While the book provides a serious student of options and a trader some excellent insights, it is not clear how accessible the..." Read more
Customers find the book easy to read and providing valuable information for trading. They say it's a good book for serious and experienced option traders, worth the effort. The book is short and goes into good detail using graphs.
"...tools to add to your kit that will increase your returns, this is a great book...." Read more
"...] and a reasonably good workbook [..." Read more
"The book is VERY interesting, but in an academic sort of way. If you are looking for anything of practical value, look elsewhere...." Read more
"...The book is an interesting read, but is heavily laced with statistically models that again point to the experienced options trader...." Read more
Customers find the book educational and worth the price. It explains option pricing behavior in the days leading up to expiration. The author discusses the effects of price pinning, volatility crashes, and time decay.
"...It explains option pricing behavior in the days leading up to expiration; behavior that is predictable enough for you to build trades to take..." Read more
"...I found the studies to be of great help in understanding pricing dynamics applied to 0 DTE options...." Read more
"...to the next expiration week as a good risk-reward, recurring money-making opportunity - the closest you can come to something resembling a salary in..." Read more
"...regarding option pricing dynamics - volatility collapse, strike price pinning, and acceleration of time decay...." Read more
Customers find the book thorough and a follow-up to the author's previous classic.
"In a very pithy and dense 'follow-up' to his previous "classic" [..." Read more
"This book is very dense and thorough. Although weekly expiry choices are now available the same principles that Augen speaks...." Read more
"Dense, Dry, & Very Good..." Read more
Customers appreciate the book's insights into volatility. They mention that periods of high volatility offer even greater returns, and the book provides details on how implied volatility collapses on option expiration days.
"...Third, I learned that periods of high volatility (like now) offer even greater opportunities, allowing me to leverage market uncertainty (fear) for..." Read more
"...a great book for providing the details on how implied volatility collapses on option expiration day...." Read more
"...The author discusses the effects of price pinning, volatility crash and time decay the last two days before option expiration and strategies - ratio..." Read more
Customers have different views on the book's language. Some find it clear and well-thought-out, with enough details. Others feel it's difficult to understand, poorly structured, and not for beginners.
"...to provide a formulaic approach, but rather a generic, well thought out framework with enough details that a serious reader can develop his/her own..." Read more
"...This is a small and simply written book but not an easy book to digest due to the huge distilled experience it conveys...." Read more
"Very clear & straight. not like other books. Most of the books on options I've read to date although interesting, did not address the issues I wanted." Read more
"I am a futures trader. This one is not for the beginner, but definitely worth the effort. His strategies are explained with solid examples...." Read more
Top reviews from the United States
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- Reviewed in the United States on August 29, 2011The Bottom Line: After reading this book, I was able to learn a few new things, incorporate them into my trading, generate more winning trades, and increase my profitability and income. Since that is why I purchased and read the book, I give it five stars.
The book does take a theoretical approach, and is best consumed by someone who understands day trading; technical analysis; options and associated terminology; option spreads, straddles, strangles; option pricing elements including delta, theta, and implied volatility. With that foundation, you will be able to take the author's strategies and apply them to today's opportunities. I would suspect one would encounter difficulty understanding the author without such a foundation. The book explains the authors insights and observations on implied volatility collapse, accelerated time-decay, and pinning. It is up to you to translate those insights into something useful within the context of your trading plans.
This bears repeating: if you are seeking a ready-made system or a step-by-step guide, look elsewhere and look to pay a lot more money. (Wouldn't it be nice if you could buy a ready-made system at this price? If there is such a thing, please post the link!) If you are looking for a few invaluable tools to add to your kit that will increase your returns, this is a great book. It explains option pricing behavior in the days leading up to expiration; behavior that is predictable enough for you to build trades to take advantage of it. The more you know what's going to happen, the more money you can make.
What did I get from the book? First, the author's detailed description with examples demonstrated the impact of Implied Volatility collapse on the last two few days before expiration; so impactful that it becomes as influential, and sometimes more influential on option prices than the movement of the underlying stock price. As a result, my pre-expiration trades are structured to take advantage of that. Second, I learned about how to build option positions immune to undesirable price movements in the underlying stocks, while still positioned to generate healthy profits in a day or two. As a result, I risk less time in the market and make more money. Third, I learned that periods of high volatility (like now) offer even greater opportunities, allowing me to leverage market uncertainty (fear) for greater profits. As a result, I modify my trading plan to focus on selling options when volatility is high and buying options when volatility is low for greater profitability. Fourth, I learned to emulate the author's approach to studying historical data to gain insights to the future. Knowing that history repeats itself gives me an edge that I can use in the zero-sum game of options trading. (I did not, however, buy any databases, build spreadsheets, or write any programs.)
After reading this book (less than $20 for the Kindle version), I am able to accurately predict option pricing behavior in the days just before expiration. I find that information to be invaluable.
- Reviewed in the United States on October 28, 2023This is a great book for providing the details on how implied volatility collapses on option expiration day. I found the studies to be of great help in understanding pricing dynamics applied to 0 DTE options.
However, the author illustrates most of his examples using 1:3 call ratio back spreads ( long 1 OTM call, short 3 further OTM calls). This constitutes a debit spread plus two naked calls for a net credit. Not for the faint hearted unless you're watching it like a hawk!
I would like to see a sequel to this book that illustrates trading near expiration options with balanced credit spreads, debit spreads, or straight long options.
- Reviewed in the United States on January 7, 2010I have and I have read my fair share of options books, but this little title was an eye opener and my best trading investment to date.
Jeff Augen has taken the time to study, analyze and put in paper for the rest of us a thorough description of option market phenomena (pricing efficiencies) that take place during options expiration week, especially expiration Thursday and Friday.
These efficiencies are the way the markets -that is, human traders, market makers and the systems they have built- compensate for the differences between the theoretical options pricing models and the real risk (or relative lack thereof) carried by an options contract that approaches expiration.
Options models like Black-Scholes-Merton assume a continuously (i.e. 24h/day) traded instrument and "frictionless trading" - i.e. no fees, no spreads and infinite liquidity. These assumptions do not hold in general, but they get totally disconnected from the trading reality during the last days in the life of an options contract. As expiration gets closer, "dead" (i.e. non-trading) time becomes an increasingly larger amount of an option contract's value. Market makers and traders respond by progressively varying implied volatility, which is the only non-deterministic variable in the options pricing formulas.
This tug-of-war between options sellers and options buyers creates a predictable pattern of implied volatility behavior during expiration week. The pattern is in itself a market efficiency: it's the way the market has come up with for adjusting the risk closer to reality, so it persists across expirations. The pattern's "depth" is relatively limited, in the sense that it does not represent an opportunity to institutional-size investors. That is why it is allowed to persist, after all. But it does represent a great opportunity to private traders who will take the time to study it and trade around it. Jeff's book lays the groundwork for it all.
This is a small and simply written book but not an easy book to digest due to the huge distilled experience it conveys. I have more than once had repeated "aha!" moments from the very same lines when revisiting (repeatedly) the text after a few more trades. So it pays to revisit it regularly.
So, this is a cookbook in the sense that you must know about cooking and are willing to experiment a little. In this respect, I disagree with the reviewers that claim the bar is set too high for the "average options trader". It is definitely exploitable "as-is", without going into the full length of duplicating the author's data and volatility decay curves. All it takes to verify is having a feel or a good understanding of the behavior of the suggested trade structures (long ratios, straddles) and try a few small or paper trades - live on an expiration day. Some recipes are easier than others, and this book is about exploitable market phenomena that are allowed to persist and repeat because they represent efficiencies to the system. So the distance between being "average" and "successful" is of the shortest ones you can find.
That said, the book might be enhanced in a second edition by adding some more detailed explanations of the underlying math; For example, I happened to find out that the "noise" in the implied volatility curves that another reviewer (Christian Farman) mentions can be reduced significantly if not eliminated when one calculates it exclusively using the out-of-the-money option; Close to expiration, time premium is so thin that the in-the-money bid-ask spread crossing when trading is enough to corrupt the in-the-money contract's implied volatility curve.
Bottom line - if you are or if you are willing to become your own trader, this book is bound to save you an awful lot of research and make you look forward to the next expiration week as a good risk-reward, recurring money-making opportunity - the closest you can come to something resembling a salary in this business. As for the "erratic options week behavior" most financial journalists love to report on - there is method in the madness, and a lot of the hows and whys are written in this little gem. An unambiguous five stars, as far as I am concerned.
Top reviews from other countries
- ROHIT GUPTAReviewed in India on December 23, 2020
5.0 out of 5 stars Excellent
Excellent book in a brief summary has explained finer points about the intricacies of expiry day trades
Really liked the book
-
JoReviewed in France on August 22, 2020
1.0 out of 5 stars Sans intérêt (pour moi)
Va dans des détails insignifiants pour la plupart des traders. C'est une étude minute par minute du comportement des options. Dans la vraie vie, je doute qu'un trader puisse en tirer des enseignements valables. C'est d'un intérêt pour ceux qui dans les académies examinent à la loupe le comprtement des options.
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A.G.Reviewed in Spain on July 5, 2017
4.0 out of 5 stars Buena lectura
La verdad que aunque sea en inglés, tiene una lectura fácil. Jeff Augen es un verdadero crack en el mundo de las opciones financieras y merece la pena saber cómo trata su operativa en la expiración de las opciones.
Explica muchas variables de su operativa aunque faltan detalles más extensos y creo que da las explicaciones justas para que luego tú trabajes y pruebes esas técnicas, ya que de por sí va a ser difíciles de aplicar desde el pirmer dia.
Aconsejable para conocedores de las opciones financieras en un nivel medio alto, nivel medio de inglés y mucha mucha paciencia y dedicación.
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Dr. Chrilly DonningerReviewed in Germany on June 15, 2009
3.0 out of 5 stars Interessant, aber...
Die Idee sich für die letzten beiden Tage das Verhalten von Optionenpreisen genauer anzuschauen ist sicher interessant. Laut dem Autor tretten bei Stock-Options 3 Effekte auf: Price-fixing entlang den Strikes, Implied-Volatility-Collapse und ein starker Time-Decay. Der letzte Effekt ist unbestritten.
Price-Fixing bedeutet: Sind die Strikes z.B. 100, 105, 110, dann bewegt sich der Kurs von Aktienen mit hohen Optionenvolumen beim Expiry (3ter Freitag) mit hoher Wahrscheinlichkeit im Bereich dieser Strikes. Das Derivat bestimmt den Preis des Underlyings. Bei Futures geht man ebenfalls davon aus, dass primär der Future den Spot bestimmt.
Allerdings kann Augen nur für 5 größere Aktien einen signifikanten Effekt nachweisen. Nachdem der Untersuchungszeitraum kurz ist, kann dies auch reiner Zufall sein. Man braucht nur genügend Werte hernehmen und bekommt immer ein paar Zeitreihen, die mit dem Ergebnis der Superbowl, dem Ausgang von Cambridge-Oxford oder der Butterproduktion in Bangladesh hoch korrelieren (Letzteres war in den 1990er Jahren beim S&P-500 der Fall).
Ich habe nur detaillierte Daten für den S&P-500. Bei einem breiten Index tritt dieser Effekt logischer Weise nicht auf.
Der Implied-Volatility-Collapse sollte beim S&P-500 aber genauso stattfinden. Tut er aber nicht. Ganz im Gegenteil, die Implied-Volatility nimmt kurz vor Expiry stark zu. Das ist auch logisch. Die Implied-Volatility basiert auf Black-Scholes. Im Black-Scholes Model diffundieren die Kurse. Es gibt keine Sprünge. In einem kurzen Zeitraum kommt eine Diffusion nicht weit. Tatsächlich gibt es aber auch Sprünge (bei Aktien vor allem nach unten). Die höhere Implied-Volatility kompensiert die im Model nicht berücksichtigte Sprungkomponente. Jump-Diffusion Modelle erklären die Optionenwerte kurz vor Expiry relativ gut.
Laut Klappentext basieren die Untersuchungen von Augen auf Methoden in der Bioinformatik. Das dürfte eine Werbedurchsage sein. Wenn er solche Methoden verwendet hat, dann stellt er sie im Buch nicht dar. Es schaut vielmehr nach brute-force Durchackern aller möglichen Daten mit ziemlich primitiven Methoden (Excel) aus. Die Ergebnisse werden auch nirgends auf ihre statistische Zuverlässigkeit getestet (siehe Superbowl). Ein Minimum wäre ein Out-Of-Sample Test.
Trotz dieser Kritik gehört das Buch aber noch zu den erfreulicheren Veröffentlichungen auf dem Trading-Gebiet. Es lohnt sich immerhin über die Ideen das Autors genauer nachzudenken und eigene Untersuchungen anzustellen. Ungeschaut würde ich die Ergebnisse aber nicht übernehmen.
- Lalit S.Reviewed in India on July 1, 2016
1.0 out of 5 stars One Star
useless ebook...avoid