For serious options traders, volatility is a crucial piece of the puzzle, and one that is necessary to understand in order to consistently make money.  Jeff Augen’s Volatility Edge is a worthwhile read for anyone wanting a new perspective on volatility.

As Jeff Augen states in the book:

Simply stated, we can define volatility as a 1 standard deviation price change over the course of one trading year.  The value is normally expressed as a percentage of the security price.  If a stock trades at $100 with a volatility of 30%, a 1 standard deviation change in a 1 year time frame will raise the price to $130 or lower the price to $70.  Using the normal distribution, we can assume a 68% chance that the final price will fall within this range.

The book covers the subject of volatility from a wide range of perspectives, from the macro view all the way to the mathematical formulas of option pricing models.  For some, the mathematical detail in the book may be either overwhelming, or just of no use in your trading regimen.   But for the aspiring option trader, understanding the mathematics is crucial to building a solid and profitable trading system.

Rather than annual volatility, the author prefers to look at daily volatility.  Further, instead of price charts, he prefers daily standard deviation charts.  And this is where it gets interesting.  The daily standard deviation chart of Cephalon covered in the book showed 5 volatilty spikes in a single year – ranging from 4.55 and 7.89 standard deviations.  This is remarkable because normal option pricing models based on the normal distribution expect a 5 standard deviation change only once in approximately 3 million trading days.  Cephalon saw 5 within a single year, and those are the types of money making opportunities that this book can teach you how to exploit.

But as I said, this book is not for everyone.  It is very well written and easy to understand, but some sections will require some persistence to get through.

Along with volatility, the book also covers simple trading systems and hedging systems that everyone can use, including:

  • Straddles and strangles
  • Covered calls and puts
  • Synthetic positions
  • Calendar and diagonal spreads
  • Ratio spreads, and calendar ratio spreads
  • Hedging with the volatility index (VIX)
  • Earnings volatility plays
  • Option expiration volatility plays

Just click on the book below to order your copy today!

The Volatility Edge in Options Trading: New Technical Strategies for Investing in Unstable Markets
The Volatility Edge in Options Trading: New Technical Strategies for Investing in Unstable Markets by Jeff Augen