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Trading Options in Turbulent Markets: Master Uncertainty Through Active Volatility Management

Trading Options in Turbulent Markets: Master Uncertainty Through Active Volatility Management

Larry Shover

ISBN: 978-0-470-93480-7

Jul 2010

254 pages


A thoughtful presentation of options trading and pricing which discusses the impact of volatility in the process

Trading Options in Turbulent Markets reveals how volatility in options trading relates to today's stormy marketplace and shows you how to manage risk and take advantage of market volatility when investing in derivatives. In this book, options expert Larry Shover skillfully addresses how to use historical volatility to predict future volatility for a security, or the implied volatility, and offers suggestions for dealing with that odd feature of options trading known as skew.

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 the married puts, collars, straddles, vertical spreads, calendar spreads, butterflies, condors, and more.

  • Contains proven tools for evaluating options trading decisions, including the greeks: delta, vega, theta, and gamma
  • Outlines effective strategies for trading options contracts in uncertain times
  • Offers insights on the risk/reward situations all traders in this field face

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



Part One: Understanding the Relationship between Market Turbulence and Option Volatility.

1 Managing Risk and Uncertainty with Options.

What Is Risk?

What Is Uncertainty?

Seven Lessons Learned from Market Volatility.

Understanding Derivatives.

The Six Benefi ts of Options.

2 Making Sense of Volatility in Options Trading.

Volatility as an Asset Class.

Analyzing Volatility with Implied Volatility.

What Does Implied Volatility Reveal?

Making Trading Decisions Based on the Disparity between Historical and Implied Volatility.

Appreciating Volatility for All It Is Worth.

How Volatility Really Works on the Trading Floor.

Volatility and Uncertainty: Lessons for the Irrational Option Trader.

Varieties of Option Volatility Trading.

3 Working with Volatility to Make Investment Decisions.

On Predicting the Future.

Starting with Historical Volatility.

Implied Volatility.

Why Do Volatilities Increase as Equities Fall?

Implied Versus Historical Volatility.

Justifi cation for the Disparity Between Historical and Implied Volatility.

4 Volatility Skew: Smile or Smirk?

Considering Some Examples.

A Primer on Random Walk and Normal Distribution.

Dealing with the Higher Moments of the Normal Distribution.

Skew Is High, Skew Is Low. So What?

Does a "Flat" or "Steep" Skew Predict the Future?

A Fair Warning About Thinking About Skew Too Much.

Part Two Understanding Option Volatility and its Relationship to Option Greeks, Personal Decision Making, and Odds Creation.

5 Extreme Volatility and Option Delta.

The Misnomer of Delta and Probability of Exercise.

Delta Defi ned.

The Relationship Between Volatility and Delta.

Higher Volatility and Delta.

Lower Volatility and Delta.

Delta, Time, and Volatility.

Delta, Position Delta, Volatility, and the Professional Trader.

6 Smoke and Mirrors: Managing Gamma through Volatile Markets.

Gamma and Volatility.

Managing Positive Gamma during a High-Volatility Environment.

The Bad News: There’s Always More than Meets the Eye.

Practical Considerations for Managing Long Gamma in a High-Volatility Environment.

Managing Negative Gamma in a High-Volatility Environment.

Practical Considerations of Negative Gamma in High Volatility.

Gamma and Volatility with Respect to Time Structure.


7 Price Explosion: Volatility and Option Vega.

The Relationship between Implied Volatility and Vega.

Implied Volatility: Price Analogy.

Option Vega and Time.

Option Vega and Its Greek Cousins.

Option Vega Implications.

Don't Underestimate the Relationship between Volatility and Option Vega.

Volatility and Vega Insensitivity.

Important Concepts When Applying Option Vega in a Volatile Marketplace.


8 Sand in the Hourglass: Volatility and Option Theta.

Balancing Time Decay with Volatility: Mistakes Traders Make.

Volatility and Theta: What Every Investor Needs to Know.

Part Three Ten Proven Strategies to Employ in Uncertain Times.

9 Preparing for Trading Using Volatility Strategies.

The Elements of a Sound Trading Decision.

Developing an Approach to Options Trading.

The Mind of a Successful Trader.

Decision Making, Options versus Everything Else.

10 The Buy-Write, or the Covered Call.

The Buy-Write (Covered Call) Defi ned.

An Example of the Covered Call Strategy.

The Theory and Reality of the Covered Call.

Covered Call Writing and Implied Volatility.

Implied Volatility in Practice.

Managing Contracts in a Time of High Volatility or a Falling Market.

Effective Call Writing in a Volatile Market.

11 Covering the Naked Put.

Contemplating the Cash-Secured Put.

Utilizing the Cash-Secured Put in a High-Volatility Environment.

Cash-Secured Put and Volatility: Risks and Consequences.

Income Strategy: Volatility as an Asset Class and Cash-Secured Puts.

Position Management.

12 The Married Put: Protecting Your Profit.

Volatility, Downside Risk, and the Case for Portfolio Insurance.

Why Buy High Volatility?

The Married Put.

How and When to Use a Married Put.

Example of When to Use a Married Put.

The Married Put: Limiting Loss, Neutralizing Volatility, and Unleashing Upside Potential.

Married Put: A Real-Life Illustration.

13 The Collar: Sleep at Night.

Collar Strategy.

Types of Collars.


Conclusions on the Collar Strategy.

14 The Straddle and Strangle: The Risks and Rewards of Volatility-Sensitive Strategies.

The Buying or Selling of Premium.

Properties of Straddles and Strangles.

Comparing Straddles and Strangles.

How to Compare Historical and Implied Volatility.

The Impact of Correlation and Implied Volatility Skew.

An Alternative to the Naked Volatility Sale via the Straddle/Strangle: The Strangle Swap.

15 The Vertical Spread and Volatility.

Introduction to the Vertical Spread.

A Trader's Reasoning for Trading a Vertical Spread.

Designing Your Vertical Spread.

Vertical Spreads and Greek Exposure.

Vertical Spreads as a Pure Volatility Play.

Comparing Volatility's Effect on Vertical Spreads.

Summary: Comparing Vertical Spreads and Implied Volatility.

16 Calendar Spreads: Trading Theta and Vega.

Calendar Spreading—Trading Time.

Risks and Rewards of the Calendar Spread.

A Calendar Spread with a Bullish Expectation.

Considerations and Observations for Calendar Spreads and Volatility.

17 Ratio Spreading: Trading Objectives Tailor Made.

How Back Spreads and Ratio Spreads Work.

Back Spreads.

Ratio Spreads.

Greek Values and the Back Spread or Ratio Spread.

Configuring and Pricing a Back Spread or Ratio Spread.

Reconciling Volatility and the Back Spread or Ratio Spread.

18 The Butterfly Spread.

Setting up a Butterfly.

The Butterfly Spread as a Volatility Investment.

Greek Values and the Butterfly.

Structuring and Pricing a Butterfly.

Trading Butterfl ies in a Volatile Market.

19 The Iron Butterfly and the Condor.

The Iron Butterfly.

The Condor.

The Iron Butterfl y, the Condor, and a Volatile Marketplace.