Trading Options 2E (Bloom Fin)

Top options expert Larry Shover returns to discuss how to interpret, and profit from, market volatility

Trading Options in Turbulent Markets, Second Edition skillfully explains the intricacies of options volatility and shows you how to use options to cope, and profit from, market turbulence. Throughout this new edition, options expert Larry Shover reveals how to use historical volatility to predict future volatility for a security and addresses how you can utilize that knowledge to make better trading decisions.

Along the way, he also defines the so-called Greeks--delta, vega, theta, and gamma--and explains what drives their values and their relationship to historic and implied volatility. Shover then provides effective strategies for trading options contracts in uncertain times, addressing the decision-making process and how to trade objectively in the face of unpredictable and irrational market moves.
* Includes a new chapter of the VIX, more advanced material on volatility suitable for institutional or intermediate options trader, and additional volatility-based strategies
* Answers complex questions such as: How does a trader know when to tolerate risk and How does a successful trader respond to adversity?
* Provides a different perspective on a variety of options strategies, including covered calls, naked and married puts, collars, straddles, vertical spreads, calendar spreads, butterflies, condors, and more

As volatility becomes a greater focus of traders and investors, Trading Options in Turbulent Markets, Second Edition will become an important resource for in-depth insights, practical advice, and profitable strategies.

Preface xiii
Acknowledgments xv
Introduction xvii
Part I: Understanding the Relationship Between Market Turbulence and Option Volatility 1
Chapter 1 Managing Risk and Uncertainty with Options 3
What Is Risk? 4
What Is Uncertainty? 4
Seven Lessons Learned from Market Volatility 5
Understanding Derivatives 7
The Six Benefits of Options 9
Chapter 2 Making Sense of Volatility in Options Trading 13
Volatility as an Asset Class 14
Analyzing Volatility with Implied Volatility 16
What Does Implied Volatility Reveal? 16
Making Trading Decisions Based on the Disparity between Historical and Implied Volatility 17
Appreciating Volatility for All It Is Worth 19
How Volatility Really Works on the Trading Floor 20
Volatility and Uncertainty: Lessons for the Irrational Option Trader 21
Varieties of Option Volatility Trading 23
Chapter 3 Working with Volatility to Make Investment Decisions 25
On Predicting the Future 25
Starting with Historical Volatility 27
Implied Volatility 32
Why Do Volatilities Increase as Equities Fall? 35
Implied versus Historical Volatility 36
Justification for the Disparity between Historical and Implied Volatility 37
Chapter 4 Volatility Skew: Smile or Smirk? 39
Considering Some Examples 40
A Primer on Random Walk and Normal Distribution 41
Dealing with the Higher Moments of the Normal Distribution 45
Skew Is High, Skew Is Low. So What? 47
Does a "Flat" or "Steep" Skew Predict the Future? 48
A Fair Warning about Thinking about Skew too Much 49
Chapter 5 Fixated on Volatility and the VIX: What Is Volatility, Anyhow? 51
What We (Think) We Know 52
Definitions of VIX 54
Grasping the VIX Index 54
VIX-A (Very) Brief History 55
VIX: Calculation and Interpretation with a Simple Calculator 56
Important Insights on the VIX Index 57
What Does the VIX Tell Us? 58
VIX and Perhaps the Biggest Misnomer of All! 59
Part II: Understanding Option Volatility and Its Relationship to Option Greeks, Personal Decision Making, and Odds Creation 61
Chapter 6 Extreme Volatility and Option Delta 63
The Misnomer of Delta and Probability of Exercise 63
Delta Defined 65
The Relationship Between Volatility and Delta 69
Higher Volatility and Delta 70
Lower Volatility and Delta 70
Delta, Time, and Volatility 71
Delta, Position Delta, Volatility, and the Professional Trader 72
Chapter 7 Smoke and Mirrors: Managing Gamma through Volatile Markets 75
Gamma and Volatility 78
Managing Positive Gamma during a High-Volatility Environment 79
The Bad News: There's Always More than Meets the Eye 80
Practical Considerations for Managing Long Gamma in a High-Volatility Environment 81
Managing Negative Gamma in a High-Volatility Environment 82
Practical Considerations of Negative Gamma in High Volatility 84
Gamma and Volatility with Respect to Time Structure 85
Summary 86
Chapter 8 Price Explosion: Volatility and Option Vega 87
The Relationship between Implied Volatility and Vega 88
Implied Volatility: Price Analogy 90
Option Vega and Time 90
Option Vega and Its Greek Cousins 91
Option Vega Implications 91
Don't Underestimate the Relationship between Volatility and Option Vega 91
Volatility and Vega Insensitivity 93
Important Concepts When Applying Option Vega in a Volatile Marketplace 94
Summary 97
Chapter 9 Sand in the Hourglass: Volatility and Option Theta 99
Balancing Time Decay with Volatility: Mistakes Traders Make 101
Volatility and Theta: What Every Investor Needs to Know 106
Chapter 10 The Nuances of Volatility: Interpreting the mix of Academics and the Study of Volatility 109
The Complication Surrounding Vega Risk in an Option Position 110
Implied Volatility Skew + Term Structure = Volatility Surface 111
Implied Volatility Term Structure 114
Did You Know Your Volatility Has Volatility? 115
The Normal Value of Volatility 117
Part III: Ten Proven Strategies To Employ In Uncertain Times 119
Chapter 11 Preparing for Trading Using Volatility Strategies 121
The Elements of a Sound Trading Decision 122
Developing an Approach to Options Trading 123
The Mind of a Successful Trader 126
Decision Making, Options versus Everything Else 128
Chapter 12 The Buy-Write, or the Covered Call 131
The Buy-Write (Covered Call) Defined 131
An Example of the Covered Call Strategy 132
The Theory and Reality of the Covered Call 133
Covered Call Writing and Implied Volatility 137
Implied Volatility in Practice 138
Managing Contracts in a Time of High Volatility or a Falling Market 142
Effective Call Writing in a Volatile Market 143
Chapter 13 Covering the Naked Put 145
Contemplating the Cash-Secured Put 147
Utilizing the Cash-Secured Put in a High-Volatility Environment 149
Cash-Secured Put and Volatility: Risks and Consequences 152
Income Strategy: Volatility as an Asset Class and Cash-Secured Puts 154
Position Management 155
Chapter 14 The Married Put: Protecting Your Profit 157
Volatility, Downside Risk, and the Case for Portfolio Insurance 157
Why Buy High Volatility? 158
The Married Put 159
How and When to Use a Married Put 161
Example of When to Use a Married Put 162
The Married Put: Limiting Loss, Neutralizing Volatility, and Unleashing Upside Potential 165
Married Put: A Real-Life Illustration 166
Chapter 15 The Collar: Sleep at Night 169
Collar Strategy 169
Types of Collars 173
Summary 177
Conclusions on the Collar Strategy 181
Chapter 16 The Straddle and Strangle: The Risks and Rewards of Volatility-Sensitive Strategies 187
The Buying or Selling of Premium 188
Properties of Straddles and Strangles 188
Comparing Straddles and Strangles 189
How to Compare Historical and Implied Volatility 192
The Impact of Correlation and Implied Volatility Skew 193
An Alternative to the Naked Volatility Sale via the Straddle/Strangle: The Strangle Swap 194
Chapter 17 The Vertical Spread and Volatility 201
Introduction to the Vertical Spread 202
A Trader's Reasoning for Trading a Vertical Spread 203
Designing Your Vertical Spread 205
Vertical Spreads and Greek Exposure 208
Vertical Spreads as a Pure Volatility Play 211
Comparing Volatility's Effect on Vertical Spreads 212
Summary: Comparing Vertical Spreads and Implied Volatility 213
Chapter 18 Calendar Spreads: Trading Theta and Vega 217
Calendar Spreading-Trading Time 218
Risks and Rewards of the Calendar Spread 219
A Calendar Spread with a Bullish Expectation 220
Considerations and Observations for Calendar Spreads and Volatility 222
Chapter 19 Ratio Spreading: Trading Objectives Tailor Made 227
How Back Spreads and Ratio Spreads Work 227
Back Spreads 229
Ratio Spreads 231
Greek Values and the Back Spread or Ratio Spread 232
Configuring and Pricing a Back Spread or Ratio Spread 236
Reconciling Volatility and the Back Spread or Ratio Spread 238
Chapter 20 The Butterfly Spread 241
Setting up a Butterfly 241
The Butterfly Spread as a Volatility Investment 245
Greek Values and the Butterfly 247
Structuring and Pricing a Butterfly 250
Trading Butterflies in a Volatile Market 250
Chapter 21 Wingspreads 253
Capturing Convergence and Divergence 253
Wingspreads: Risk/Reward 254
Wingspreads: Sensitivities 254
Wingspreads and the Greeks 255
Wingspreads: Various and Sundry Details 257
The Condor Spread 258
Conclusion 267
About the Author 269
Index 271