Well, I am back to trading options. I am still trading futures, but I still missed options and I have been back to trading for the past month. I had a great month, and I will start posting my journal.

Title : Get Rich With Options: Four Winning Strategies Straight from the Exchange Floor
Author : Lee Lowell
List Price: $39.95
Street Price : ~$26.00 ~ $28.00

Starting with the title of this book, I was not happy. The title sounds too much like a 2am infomercial than a good book on options trading. At first , you think maybe just the title is ‘hype-y’, but here is a quote from inside the flap:

Lowell explains the only four options trading strategies that actually work: buying deep-in-the-money call options, selling naked puts, selling option credit spreads, and selling covered calls.

He gave a fifth “bonus strategy” which is ratio spreads.

Really? The only strategies that make money? I don’t know a lot of professional option would use these strategies. Oh wait, there is one I know who used those strategies. Niederhoffer. He sold naked puts ( which is the same as covered calls ). We all know what happened to him.

Now the book was not all ‘hype-y’. The author did do a good job of simplifying options, and gave some good tips on trading options. But claiming these are the only four option strategies that work, was a little over the top for me. I should mention that covered calls and naked puts have the same return profile so it is only three strategies anyway.

The thing to remember is that this guy traded commodity options on the floor of the New York Mercantile Exchange (NYMEX) , which are a different beast than equity options. He was pretty light on the money/risk management side of things. I do give him credit for talking about DITM calls which is not really discussed in options literature.

Bottom Line : Cannot recommend this book other than light reading for an option trader. If you are starting out, there are much better books. If you already know what you are doing, this book will not teach you much.

I have been saying things like this ( Short vega, etc ) for so long, I should realize that on the surface it does not make too much sense.

What I am talking about is how your current position reacts to one of the greeks. Let’s take short vega as an example, also called negative vega and short volatility they mean the same thing. Your position makes money if if volatility decreases.

[EDITED - Thanks Michael . Man, I need to find a proofreading 101 class]

Long Theta is a little bit stranger. Long theta means your position makes money as time passes. Time usually moves forward, so we pretty much know long theta will help our position. How much it help depends on other factors.

SO here is an example. The Mar 08 250 BIDU put closed at 16.90 ( 2/15/08 ) with BIDU closing at $259.10. The position is short theta in that it loses money over time. The amount it loses increases every day, with the rate increasing the most in the last 30 days.

Using a option calculator, and advancing the date to Monday ( 2/18/08 ) , we have a price of $16.03. A loss of about ~$29 a day. Now, this is if implied volatility and price of the stock do not change. Both of these are unlikely, since the implied volatility on Fridays gets messed around.

So the BIDU 250 PUT is short theta in that the option is losing $29 a day.

Personally, I like long theta trades. IF / WHEN you are wrong in your equity selection, you have time to adjust your trade without have to pay the “vig” everyday.

~ squid

I like writing again. Maybe I will start doing book reviews or something.

So just some thoughts on volatility contraction ( or crush ). One of the inputs to option pricing models is something called ‘volatility’. This is the only unknown input into option pricing formulas. It is a prediction of how volatile the stock WILL be in the future. Since we do not know what the future price of the stock is, this volatility is a ‘guess’.

I want to use Michael’s BIDU call as an example. Michael Trader bought a Mar08 250 Put. Today it closed at $21.50. Since the put is out of the money, the price is heavily influenced by the pricing model which is determined by the future volatility, or rather the guess of the future volatility.

So what does this mean for the price of Michael’s put ? BIDU’s earnings were after the close and they came inline with expectations. Well, since during the trading day, we could not predict what the earnings would be ( or what the market reaction would be ) traders charged a higher premium ( higher volatility ) to sell options to cover their a$$’es in the case of a huge move. So now after earnings, option sellers would not charge such a high premium for options.

So after earnings, even if the stock price does not change, the price of the option will probably fall. There are lots of other things that could happen, but I would not go into those here. We can expect , all things being equal, Michael’s put opening lower. Sometimes the volatility crush can be huge, sometimes not that great. But that is the nature of trading.

And to Michael , dude, we have all been there. Good luck.