The Options Trader's Workbook: A Problem-Solving Approach

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9780137148103: The Options Trader's Workbook: A Problem-Solving Approach

“Unlike most books that oversimplify trading situations, Augen’s approach forces you to learn by solving real-world problems where stock prices spike up and down and volatility changes constantly. Learning by doing is a distinct advantage for both novice and expert.”

--Sean Sztern, Alternative Strategies Group, Desjardins Securities

 

“This workbook represents a unique and effective learning tool. It will broaden your understanding of options and raise your trading skills to a higher level.”

--Dr. W. Edward Olmstead, Northwestern University, author of Options for the Beginner and Beyond

 

“Serious options trading requires skills that can only be learned through practice. Augen’s progressively more challenging problems definitely provide that real-world practice. There are lessons here for everyone, from beginner to sophisticated professional.”

--James Marcus, Partner, CMG Holdings, LLC

 

Most options books offer theory and strategies but don’t give you what you really need: hands-on practice that prepares you for real-world trading, where subtle decisions make the difference between winning and losing. Now, there’s a solution: The Option Trader’s Workbook.

 

Using a question and answer format, this innovative workbook covers key scenarios you’ll encounter as an option trader. Expert trader Jeff Augen explains the challenges they present, reveals the potential pitfalls, and walks you through each example to help you understand how to maximize your success. You’ll master trades designed to profit from rising or falling stock prices, rising or falling volatility, time decay, rapid price spikes, and many other market dynamics. Each section helps you build your skills one trade at a time---whether you’re new to options or you’ve been trading for years.

  • Learn by doing--not by reading or memorizing
    Practice real decision-making in real trading situations
  • Gain a detailed, intuitive understanding of pricing
    Understand exactly what must happen for your trade to be profitable
  • Learn to identify efficient trade structures
    Avoid errors that cause losses even when you’ve correctly predicted a stock’s direction
  • Learn how to manage risk effectively
    Optimize profits by choosing the right option strategy for a particular situation
  • Use complex trading strategies with confidence
    Master highly profitable techniques used by professionals

 

"synopsis" may belong to another edition of this title.

About the Author:

Jeff Augen, currently a private investor and writer, has spent more than 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.

 

As a cofounding 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 2002-2005, he was President/CEO of TurboWorx, a software company founded by the chairman of the Department of Computer Science at Yale University. He is the author of two previous books: The Volatility Edge in Options Trading (FT Press 2008) and Bioinformatics in the Post-Genomic Era (Addison-Wesley 2005).

Excerpt. Reprinted by permission. All rights reserved.:

Preface

Preface

There are two kinds of successful investors: those who admit to occasionally losing money and those who don’t. Despite claims to the contrary, every investor loses money because risk always scales in proportion to reward. Long-term winners don’t succeed by never losing; they succeed because their trades are well thought out and carefully structured. That said, very few investors recognize the impact of their own trading mistakes.

These mistakes can be subtle. The classic example goes something like this:

  1. “I bought calls.”
  2. “The stock went up, but I still lost money!”

This frustrating scenario in which an investor correctly predicts a stock’s direction but loses money is incredibly common in the option trading world. Leverage is almost always the culprit. More precisely, it is the misuse of leverage that stems from a fundamental misunderstanding of risk that so often turns investing into gambling with the simple click of a mouse. Option traders are famous for this mistake. They know, for example, that a sharp rise in the price of a stock can generate tremendous profit from nearly worthless far out-of-the-money calls. But lead is not so easily transmuted into gold. The problem is entangled with complex issues like collapsing volatility, accelerating time decay, and regression toward the mean. Institutional traders understand these issues and they rarely make these mistakes. Thousands of trades have taught them that not losing money is the very best way to generate a profit.

It’s the thousands of trades, winners and losers both, that separate professionals from amateurs. Option trading is just like playing chess: It requires study and practice. The comparison is more valid than you might think. Both chess and option trading are governed by a complex set of rules. Risk analysis is at the center of both games; so is positional judgment and the ability to react quickly. Chess players learn to identify patterns; option traders, in their own way, must learn to do the same.

This book is constructed around these themes. It is designed to let investors explore a vast array of rules and trade structures by solving real-life problems. This approach differs markedly from the catalog of structured trades that seems to have become the contemporary standard for option trading books. Many fine texts have been written on the subject, but most build on this design with slightly different organization or a few novel trading ideas. Collectively they miss the point. Learning to trade options is an active process, best accomplished through doing rather than reading and memorizing. In this regard we have avoided the familiar but bewildering list that includes names like “reverse diagonal calendar spread,” “condor,” and “short strangle.” In their place you will find more descriptive phrases like “sell the near-dated option and buy the far-dated option.” But, more importantly, these descriptions appear in the context of trading situations in which the reader is asked to make a choice, predict an outcome, or design a correction. Moreover, the problems build on each other with each section progressing from basic to advanced.

Our goal was to challenge option traders at all levels. So take your time, work through the problems at a comfortable pace, and, most important of all, make your trading mistakes here instead of in your brokerage account.


© Copyright Pearson Education. All rights reserved.

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