Please recommend good books for option trading?

mizhael · Jan 9, 2009

Thanks folks.

Still, I would appreciate if anybody can tell me how to practice the knowledge learned from Nataberg's book in day-to-day trading?

Cutten · Jan 9, 2009

Spoken like a true options trader, rather than as a speculator.

My approach - I don't care about historical vol. I am comparing an option's premium to the estimated risk on an outright. High or low implied vol is irrelevant - I only care about premium relative to the likely move. Some of my best options trades have been buying premium at all-time highs. There is nothing so cheap as an expensive option - when implied vol is high, that's when deep OTM options are bargains because future vol int the underlying will be even bigger.

The reason to use options not the underlying is because the risk is limited and the reward to risk is better.

Options are sometimes the best tool for betting on direction. The Greeks don't need to come into it at all. IMO Greeks are for trading options vs options, or betting on vol changes.

Quote from dmo:

To me a better question is how would you trade options without a pricing model and greeks?

First, you want to know whether the options you are considering are cheap or expensive historically speaking. Are they as cheap as they've ever been? Are they as expensive as they've ever been? Are they near the middle of their historic range?

Now, the only way to evaluate the cheapness or expensiveness of an option is by looking at its implied volatility. And for that you need a pricing model.

You'll want to look at the cheapness or expensiveness of different months to see how those correspond to historic norms and ranges. Is the spread between the front month and second month closer than usual? Wider apart than usual? As wide apart as it's ever been?

You'll want to look at the cheapness or expensiveness of the different strikes in relation to one another - the skew. Let's say the OTM calls are trading at a higher IV - which is to say they are more expensive - than the OTM puts. Is that the way they normally trade? Or is that an anomaly since the OTM puts usually are more expensive than the OTM calls? How do those relate to the ATMs? How does that compare to their historically normal relationship?

If you find an anomaly - some IV relationship that differs from historical norms - you may want to make a play based on the assumption that historical norms will reassert themselves. But in order to do that intelligently, you have to understand how options behave. You have to know that as IV rises, the options with more time remaining will rise in price faster than options with less time remaining (vega). You have to know that options with less time remaining will decay faster than options with more time remaining (theta). If you are long and/or short options at different strikes, you may not know at a glance whether you make money or lose money as the underlying rises, so you need to calculate the delta. As the option moves, you'll want to know whether the delta changes in the direction you want it to change (positive gamma) or in the direction you DON'T want it to change (negative gamma) - and how much it changes.

If all you want to do is play the direction of a stock or futures contract, then I would not bother with options. Options add a few dimensions to the game, and without a pricing model and a thorough understanding of greeks, you are flying blind.
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dmo · Jan 9, 2009

Quote from Cutten:

Spoken like a true options trader, rather than as a speculator.

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Cutten, I didn't realize I was so transparent, but you nailed me dead to rights. It's true - the less opinion I have about the direction of the underlying, the better I do. But as your experience demonstrates, there's more than one way to skin an option. I could never make money trading the way you do. I guess it goes to show once again that finding a winning style all depends on what you're good at.

murray t turtle · Jan 10, 2009

Quote from mizhael:

Thanks folks.

Still, I would appreciate if anybody can tell me how to practice the knowledge learned from Nataberg's book in day-to-day trading?
More...

===========================
MiZel;
a]Its been mentioned before;
free read this forum,, most all of it.
And MR Sheldon Natenburg said -when considering clothes to wear, look @ other traders, look @[hi- low perhaps]weather, look out window.......................................

b] Big Trends in Trading;
book by Price Headly[ that's his real firstname, Price,Price is not a nickname] Excellant on price,stocks & options.

c]c note is $100;
100% is a nice round number to think about taking profits,
in stocks, options. Not necessarily a good place to take profits in real estate, which produces income & tends not to decay.................Hope this wisdom helps;
it helps me.

murray, real name;
turtle=nickname since childhood

cowtowner · Jan 11, 2009

Besides the obvious two (Natenburg and McMillan), i found "The Option trader Handbook" a good reference that I have on my desk at home and work.

Bought it before I realized the guy that wrote it posts on this very board.

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Please recommend good books for option trading?

mizhael

Cutten

dmo

murray t turtle

cowtowner