Trading Options at Expiration: Strategies and Models for Winning the Endgame 1st Edition

I have and I have read my fair share of options books, but this little title was an eye opener and my best trading investment to date.Jeff Augen has taken the time to study, analyze and put in paper for the rest of us a thorough description of option market phenomena (pricing efficiencies) that take place during options expiration week, especially expiration Thursday and Friday.These efficiencies are the way the markets -that is, human traders, market makers and the systems they have built- compensate for the differences between the theoretical options pricing models and the real risk (or relative lack thereof) carried by an options contract that approaches expiration.Options models like Black-Scholes-Merton assume a continuously (i.e. 24h/day) traded instrument and "frictionless trading" - i.e. no fees, no spreads and infinite liquidity. These assumptions do not hold in general, but they get totally disconnected from the trading reality during the last days in the life of an options contract. As expiration gets closer, "dead" (i.e. non-trading) time becomes an increasingly larger amount of an option contract's value. Market makers and traders respond by progressively varying implied volatility, which is the only non-deterministic variable in the options pricing formulas.This tug-of-war between options sellers and options buyers creates a predictable pattern of implied volatility behavior during expiration week. The pattern is in itself a market efficiency: it's the way the market has come up with for adjusting the risk closer to reality, so it persists across expirations. The pattern's "depth" is relatively limited, in the sense that it does not represent an opportunity to institutional-size investors. That is why it is allowed to persist, after all. But it does represent a great opportunity to private traders who will take the time to study it and trade around it. Jeff's book lays the groundwork for it all.This is a small and simply written book but not an easy book to digest due to the huge distilled experience it conveys. I have more than once had repeated "aha!" moments from the very same lines when revisiting (repeatedly) the text after a few more trades. So it pays to revisit it regularly.So, this is a cookbook in the sense that you must know about cooking and are willing to experiment a little. In this respect, I disagree with the reviewers that claim the bar is set too high for the "average options trader". It is definitely exploitable "as-is", without going into the full length of duplicating the author's data and volatility decay curves. All it takes to verify is having a feel or a good understanding of the behavior of the suggested trade structures (long ratios, straddles) and try a few small or paper trades - live on an expiration day. Some recipes are easier than others, and this book is about exploitable market phenomena that are allowed to persist and repeat because they represent efficiencies to the system. So the distance between being "average" and "successful" is of the shortest ones you can find.That said, the book might be enhanced in a second edition by adding some more detailed explanations of the underlying math; For example, I happened to find out that the "noise" in the implied volatility curves that another reviewer (Christian Farman) mentions can be reduced significantly if not eliminated when one calculates it exclusively using the out-of-the-money option; Close to expiration, time premium is so thin that the in-the-money bid-ask spread crossing when trading is enough to corrupt the in-the-money contract's implied volatility curve.Bottom line - if you are or if you are willing to become your own trader, this book is bound to save you an awful lot of research and make you look forward to the next expiration week as a good risk-reward, recurring money-making opportunity - the closest you can come to something resembling a salary in this business. As for the "erratic options week behavior" most financial journalists love to report on - there is method in the madness, and a lot of the hows and whys are written in this little gem. An unambiguous five stars, as far as I am concerned.

This is a great book for providing the details on how implied volatility collapses on option expiration day. I found the studies to be of great help in understanding pricing dynamics applied to 0 DTE options.However, the author illustrates most of his examples using 1:3 call ratio back spreads ( long 1 OTM call, short 3 further OTM calls). This constitutes a debit spread plus two naked calls for a net credit. Not for the faint hearted unless you're watching it like a hawk!I would like to see a sequel to this book that illustrates trading near expiration options with balanced credit spreads, debit spreads, or straight long options.

The Bottom Line: After reading this book, I was able to learn a few new things, incorporate them into my trading, generate more winning trades, and increase my profitability and income. Since that is why I purchased and read the book, I give it five stars.The book does take a theoretical approach, and is best consumed by someone who understands day trading; technical analysis; options and associated terminology; option spreads, straddles, strangles; option pricing elements including delta, theta, and implied volatility. With that foundation, you will be able to take the author's strategies and apply them to today's opportunities. I would suspect one would encounter difficulty understanding the author without such a foundation. The book explains the authors insights and observations on implied volatility collapse, accelerated time-decay, and pinning. It is up to you to translate those insights into something useful within the context of your trading plans.This bears repeating: if you are seeking a ready-made system or a step-by-step guide, look elsewhere and look to pay a lot more money. (Wouldn't it be nice if you could buy a ready-made system at this price? If there is such a thing, please post the link!) If you are looking for a few invaluable tools to add to your kit that will increase your returns, this is a great book. It explains option pricing behavior in the days leading up to expiration; behavior that is predictable enough for you to build trades to take advantage of it. The more you know what's going to happen, the more money you can make.What did I get from the book? First, the author's detailed description with examples demonstrated the impact of Implied Volatility collapse on the last two few days before expiration; so impactful that it becomes as influential, and sometimes more influential on option prices than the movement of the underlying stock price. As a result, my pre-expiration trades are structured to take advantage of that. Second, I learned about how to build option positions immune to undesirable price movements in the underlying stocks, while still positioned to generate healthy profits in a day or two. As a result, I risk less time in the market and make more money. Third, I learned that periods of high volatility (like now) offer even greater opportunities, allowing me to leverage market uncertainty (fear) for greater profits. As a result, I modify my trading plan to focus on selling options when volatility is high and buying options when volatility is low for greater profitability. Fourth, I learned to emulate the author's approach to studying historical data to gain insights to the future. Knowing that history repeats itself gives me an edge that I can use in the zero-sum game of options trading. (I did not, however, buy any databases, build spreadsheets, or write any programs.)After reading this book (less than $20 for the Kindle version), I am able to accurately predict option pricing behavior in the days just before expiration. I find that information to be invaluable.