Larry Shover - Trading Options in Turbulent Markets

Contents

Since 1996, Bloomberg Press has published books for financial professionals on investing, economics, and policy affecting investors. Titles are written by leading practitioners and authorities, and have been translated into more than 20 languages.

The Bloomberg Financial Series provides both core reference knowledge and actionable information for financial professionals. The books are written by experts familiar with the work flows, challenges, and demands of investment professionals who trade the markets, manage money, and analyze investments in their capacity of growing and protecting wealth, hedging risk, and generating revenue.

For a list of available titles, please visit our web site at www.wiley.com/go/bloombergpress .

Cover Design: C. Wallace

Cover Image: Ocean waves Irina Belousa/iStockphoto

Copyright 2013 by Larry Shover. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

The First Edition of Trading Options in Turbulent Markets was published by Bloomberg Press in 2010.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com . Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions .

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002.

Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com . For more information about Wiley products, visit www.wiley.com .

Library of Congress Cataloging-in-Publication Data:

Shover, Larry.

Trading options in turbulent markets : master uncertainty through active volatility management / Larry Shover. 2nd ed.

p. cm.

Includes index.

ISBN 978-1-118-34354-8 (cloth); ISBN 978-1-118-41663-1 (ebk); ISBN 978-1-118-43403-1 (ebk); ISBN 978-1-118-42021-8 (ebk)

1. Options (Finance) 2. Risk management. I. Title.

HG6024.A3S537 2012

332.6453dc23

2012038304

To Maribeth, Megan, Tim, & Andy

Preface

Trading Options in Turbulent Markets, Second Edition further reveals how volatility in options trading relates to todays stormy marketplace and shows you how to manage risk and take advantage of market volatility when investing in derivatives. This book addresses how to use historical volatility to help predict the future value of a security, or the implied volatility, and offers suggestions for dealing with that odd feature of options trading known as skewin which the options market has, in recent decades, essentially developed its own consciousness and can respond to market conditions that defy all logic. Skew is uncertainty squared, and here, I describe how to work with or around it.

This book also includes proven tools for evaluating options trading decisions: the Greeksdelta, vega, theta, and gamma. We will define the values carefully and describe how each relates to volatility. In addition, you will discover effective strategies for trading options contracts in uncertain times, explore the decision-making process in broad terms, and learn how to become a steel-nerved trader. Along the way, this book answers complex issues such as: How does a trader know when to tolerate risk? How does a successful trader think or respond to adversity? How does a trader lose well?

Trading Options in Turbulent Markets also looks at specific options trading strategies that help you offset risk and reach for profit. These include the covered call, the naked and married puts, collars, straddles, vertical spreads, calendar spreads, butterflies, along with a new chapter on wingspreads. This second edition features a deeper dive into the vastly popular VIXthe fear gaugealong with the uncovering of various volatility terms once reserved for the institutional world that are now becoming more mainstream.

Filled with in-depth insights and practical advice, this important resource explores how to turn turbulent markets into profitable opportunities and reveals why options are the best tool to use in such a difficult endeavor.

Acknowledgments

I would like to begin by saying thank you to the hundreds of brokers, traders, clerks, and exchange personnel with whom Ive shared both the opportunity and privilege to grow and learn as a trader over the years. Spending countless hours jammed shoulder-to-shoulder with other traders and trading staff produces a bonda familial linkthat transcends both emotions and time. I started in this industry as an 18-year-old boy. Now, looking back, I reflect on the lessons learned, the emotions, the broken dreams, the vast fortunes made and lost, as well as the raging hostility of my fellow traders at times, and the fear. All of this I have collected and filed away. The ink spilt during the writing of this book is the result of this experience, and for that I am most grateful.

A very special thanks to my original editor, Stephen Isaacs, of Bloomberg Press. To date, Stephens phone is never far awayhe continues to be available to me for anything and everything!

Thanks also to my John Wiley & Sons family! To Kevin Commins and Marty Schecter, both of whom worked vigorously crafting the vision necessary for this second edition; always moving the mountain in the right direction! To Meg Freeborna senior development editor that most authors could only hope for. To my senior publicist, Stacy Smith, who took my book quite personallydoing whatever it took to help it become a true evergreen!

A big round of applause to Josh Suckenic of OptionsXpress, who early on appreciated the uniqueness of my book and helped create the vision for this second edition.