David Caplan put together a fairly lengthy and detailed book that revolves around using volatility to your advantage in trading futures options. While volatility is the main thrust of The New Option Secret – Volatility: The Weapon of the Professional Trader and the Most Important Indicator in Option Trading, most of the popular trading strategies for futures options are covered, with the focus on when to use each strategy under a particular level of volatility.
Volatility on Futures and Options
Option sellers are ultimately the individuals who create prices for options. Professional option traders are masters at this game. They basically play the odds. If a market is range bound with little daily movement for a period of time, they will require less insurance (option premium) when selling options, so options will be considered cheap. Oppositely, they will require a greater premium in order to sell options if a futures market is making large daily moves, so options will be considered expensive.
Futures Option Trading Strategies
The author also shows you how to compare the volatility level of different options to make your trading decisions. For example, an at-the-money option may have a volatility level of 20 percent, while an out-of-the-money option may have a volatility level of 35 percent. The authors suggest that you should consider buying the at-the-money option and selling the (overpriced) out-of-the-money options against them.
Real World Trading and Risk Management
In essence, you are missing out on a whole trading package with this book. The author does discuss a few money management techniques, which include closing positions on short options if the strike price is hit or close and sell further out of the money options.
Most of the examples in the book deal with holding options until expiration and what the end result would be. They mostly deal with the value of options at expiration. Anyone who has traded options knows it isn’t that simple. For example, you could sell an out-of-the-money soybean option for 5 cents ($250) and it could jump to 15 cents ($750) and still be out-of-the-money. What do you do in this case? Those scenarios were rarely, if at all, covered in the book.
Overall, The New Option Secret – Volatility: The Weapon of the Professional Trader and the Most Important Indicator in Option Trading is a solid book on utilizing option volatility for trading futures options. I don’t see it as a complete trading plan for futures options, but it gives you a great deal of information for creating you own. The last part of the book includes several articles written by other authors / analysts. Many focus on stock options, but many of the principles still apply.
