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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Serie: Wiley Trading Series
- Sprache: Englisch
Sheldon Natenberg is one of the most sought after speakers on the topic of option trading and volatility strategies. This book takes Sheldon's non-technical, carefully crafted presentation style and applies it to a book--one that you'll study and carry around for years as your personal consultant. Learn about the most vital concepts that define options trading, concepts you'll need to analyze and trade with confidence. In this volume, Sheldon explains the difference between historical volatility, future volatility, and implied volatility. He provides real inspiration and wisdom gleaned from years of trading experience. Th is book captures the energy of the spoken message direct from the source. * Learn about implied volatility and how it is calculated * Gain insight into the assumptions driving an options pricing model * Master the techniques of comparing price to value * Realize the important part that probability plays in estimating option prices
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Seitenzahl: 152
Veröffentlichungsjahr: 2012
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Table of Contents
Meet Sheldon Natenberg
Chapter 1: The Most Important Tool for any Options Trader
Your Goal Is Not to Cut off Your Hand
Black-Scholes: The Grandfather of Pricing Models
The Fundamental Elements of Any Pricing Model
Chapter 2: Probability and Its Role in Valuing Options
Overcoming the Subjective Nature of the Process
The Problem with Probabilities
You Can Agree to Disagree
Expanding the Realm of Probabilities
What Constitutes a Normal Distribution?
How Distribution Assumptions Affect Option Pricing
The Symmetrical Nature of Distribution Curves
Chapter 3: Using Standard Deviation to Assess Levels of Volatility
Standard Deviation
Volatility Numbers Are Fluid
Adjusting Volatility for Differing Time Periods
Examples of a Standard Deviation Conversion
Verifying Volatility
Chapter 4: Making Your Pricing Model More Accurate
Some Essential Adjustments to Your Volatility Input
Key Differences in a Lognormal Distribution
When the Market Disagrees With the Models
Chapter 5: The Four Types of Volatility and How to Evaluate Them
The First Interpretation: Future Volatility
The Second Interpretation: Historical Volatility
The Third Interpretation: Forecast Volatility
The Fourth Interpretation: Implied Volatility
Checking the Inputs: How to Correct Your Valuation
Simplifying the Volatility Assessment
Chapter 6: Volatility Trading Strategies
The Fundamentals of Volatility Trading
Further Adjustments Required
A Black-Scholes Anecdote
The Risks of Volatility Trading
Are You Naked—Or Are You Covered?
A Visual Picture of Volatility
Using Volatility to Improve Your Predictions
A Quick Look at Volatility Cones
The Two Primary Models for Predicting Volatility
Margin Requirements and Commissions
Chapter 7: Theoretical Models vs the Real World
Summary
Appendix A: Option Fundamentals
Appendix B: A Basic Look at Black-Scholes
Appendix C: Calendar Spread
Appendix D: Greeks of Option Valuation
Appendix E: Key Terms
Index
Trading Resource Guide
Recommended Reading
Copyright © 2007 by Sheldon Natenberg
Published by John Wiley & Sons, Inc., Hoboken, New Jersey
Published simultaneously in Canada
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Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with the respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor the author shall be liable for damages arising herefrom.
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Library of Congress Cataloging-in-Publication Data:
MEET SHELDON NATENBERG
As you will learn later in this book, volatility is the most nebulous factor in determining what the value, and therefore the price, of an option actually should be—and no one is more adept at assessing volatility than Sheldon Natenberg.
As Director of Education for Chicago Trading Company and a highly sought-after lecturer at professional training seminars both here and abroad, Sheldon has helped many of the world’s top institutional investors, mutual fund managers, and brokerage analysts better understand volatility and utilize it in valuing and pricing options of all types.
However, his greatest claim to fame came as the result of his authorship of Option Volatility and Pricing: Advanced Trading Strategies and Techniques (McGraw Hill, 1994)—considered by many to be the finest book ever written on the subject. First published in 1988 (revised in 1994), the book established Sheldon as one of the world’s most acclaimed authorities on volatility and its impact on option pricing and trading strategies—a reputation he has continued to build ever since. His ongoing success at evaluating and applying option trading strategies ultimately earned him induction into the Trader’s Hall of Fame.
What Sheldon Is Preparing to Tell You
So, why do you need Sheldon’s expertise? Quite simply, because volatility has become a dominant factor in today’s world—not only in the investment markets, but also in everyday life. Though this book may not enable you to understand fully the growing political, economic, and social turbulence that roils daily life, it will help you understand—and potentially profit from—the extreme volatility apparent in the financial arena over the past two decades.
In the pages that follow, Sheldon will explain the theoretical basis of volatility systematically, showing you how to calculate volatility levels in various markets, how volatility affects the price movements of different investment instruments, and how you can profit from those price movements.
He will talk about the four different categories of volatility, the differences between them, and the types that play the most important role in the leading theoretical pricing models. He will also fully describe the most popular option pricing models in use today and discuss their advantages, as well as some problems you may encounter when using them.
Specifically, he will detail the critical impact that volatility has in establishing values and prices for exchange-traded options and reveal the most common strategies for capturing the discrepancies that develop when option prices and values get out of line.
In addition, he will do it all with a minimum of mathematical equations and technical jargon.
In short, whether you’ve been an active trader for years or are just now considering whether to buy your first put or call, the advice Sheldon provides will prove invaluable in integrating options into your personal arsenal of investment strategies.
Chapter 1
THE MOST IMPORTANT TOOL FOR ANY OPTIONS TRADER
I’m going to be talking to you about options, explaining how volatility affects the valuation and pricing of options, and how you can use this information to refine your option trading strategies and improve your trading results.
First, though, I’d like to offer a very short personal introduction. Depending on your situation, this is a bit unusual for me because I’m used to dealing almost solely with professional traders—traders for market-making firms, financial institutions, floor traders, computer traders, and so forth. I know that you may not be a professional trader. However, lest that concern you, I’d like to assure you of one thing:
The principles of option evaluation are essentially the same for everyone.
Second, by way of disclaimer, I want to clarify something immediately: I am not going to tell you how to trade.
Everyone has a different background. Everyone has a different goal in the market . . . different reasons for making specific trades. What I hope you’ll at least be able to do—from the limited amount of information I’m going to provide—is learn how to make better trading decisions.
However, you’re the one who must decide what decisions you’re going to make.
Your Goal Is Not to Cut off Your Hand
Learning about options is like learning how to use tools—and everyone applies tools in different ways. For example, if somebody teaches you how to use a saw, your first question becomes, “What can I do with this saw?”
Well, depending on how well you’ve learned your lesson, either you can make a beautiful piece of furniture—or you can cut off your hand.
Obviously, those are the two extremes: there are many other uses in between. My point here is that I’m trying to help you avoid cutting off your hand. You may not learn enough to become a professional trader, but you will learn enough to avoid disaster, and greatly improve your trading skills.
Maybe that’s not the best analogy, but I think you get the idea.
People often ask me about the types of strategies I use and which are my favorites. I think most professionals would agree with me: I’ll do anything if the price is right.
The same standard defines my “favorite” strategy, because my favorite is any strategy that works—and, if the price is right, a strategy usually works.
So, how do I determine whether the price is right?
I determine if the price is right the way almost everybody does: I use some type of theoretical pricing model—some type of mathematical model that helps me determine what I think the price ought to be.
Then, whatever strategy I choose to use depends on whether the actual prices available in the market deviate from what I think they ought to be, or whether they’re consistent with what I think they ought to be.
So, the primary tool for any professional option trader is a theoretical pricing model—and, if you’re going to succeed with your own trades, such a model will become your primary tool as well. With that in mind, let’s talk about a typical theoretical pricing model.
Black-Scholes: The Grandfather of Pricing Models
By far, the most common option-pricing tool used today is the Black-Scholes model (See Appendix B for details). Of course, there are other models that are also widely used, but the Black-Scholes model is most famous because it was the first really widely used pricing model. It was also a theoretical innovation—so much so that Myron Scholes and Robert Merton, who helped develop the model, received the Nobel Prize in Economics for its development.
So, if Merton shared in the prize, why is it called the Black-Scholes model?
Well, as a quick aside, this is a perfect illustration of the fact that life is not fair. The Nobel Prize is given posthumously only if you die within six months of the awarding of the honor. Fisher Black did much of the theoretical work in developing the Black-Scholes model—but because he died roughly eight months before the honors were announced, he missed the Nobel Prize.
Of course, his name lives on in the title of the model—and everyone who knows the story acknowledges that Black really shared the Nobel Prize with Scholes and Merton.
The Fundamental Elements of Any Pricing Model
Whether you use Black-Scholes or some other pricing model, there are certain inputs that have to be plugged into the formula. Only after you enter all of these inputs into the model you’re using can you come up with a theoretical value for an option. So, let’s take a look at the required inputs (Figure 1).
FIGURE 1
Most pricing models, including Black-Scholes, require five—or, in some cases involving stocks, six—inputs. If you’ve done any analytical work with options at all, you’re likely familiar with the first four of these inputs:
The exercise price
Time to expiration
The price of the underlying security
The current interest rate
That’s because these are things you can generally observe in the marketplace, as is dividend information, which is the added input stock traders are required to factor into the model. You may not know exactly what the correct interest rate is, or exactly what the underlying stock or futures price is, but you can make a pretty good guess. Likewise, if you’re doing stock options, it’s pretty easy to come up with the dividend. Obviously, if you’re trading index options or options on futures, there is no dividend.
The big problem with almost every model, including Black-Scholes, is volatility.
It’s the one input that you can’t directly observe in the marketplace. Of course, there are sources of volatility data that might enable us to guess what the right volatility input is. However, we never really know exactly whether we’re correct—and that’s the big, big headache for all traders who use a theoretical pricing model.
Not only is it extremely difficult to determine the volatility, but traders learn very quickly that, if you raise or lower the volatility just a little, it can have a tremendous impact on the value of the option. What happens?
Either the option’s value explodes, or it collapses.
Obviously, whether you’re a professional trader devising hedging strategies for a mutual fund or an individual investor selecting options for a covered-writing program in your personal account, a lot will ride on your ability to determine a correct volatility input for the theoretical pricing model. You simply can’t afford—in terms of either money or long-term trading success—to be at the mercy of such errors in valuation.
That’s why I focus the bulk of my discussion on just what this volatility input is—what it means, how it’s used, how you interpret it, and so forth.
Chapter 2
PROBABILITY AND ITS ROLE IN VALUING OPTIONS
To understand volatility and why it’s so important in calculating option values, you have to understand a little bit more about how theoretical pricing models work. This doesn’t mean I’m going to launch into a lengthy discussion of option theory, nor am I going to present some complex differential equation and walk you through it step by step like I might if this were a university classroom. You got the only complicated equation you’re ever going to get in Chapter 1 and, as noted, it’s unlikely you’ll ever actually need to use it.
What I am going to do is discuss, in general terms, the logic underlying the theoretical pricing models, and use some basic examples to illustrate how they work. As we go through this process, I think you’ll find that all of the models are actually fairly easy to understand in terms of the reasoning that goes into them.
For starters, Black-Scholes and all the other theoretical models that we use in determining option values are probability based. What exactly does that mean? Well, consider this:
Assume you went out and bought a stock, or you bought a futures contract. Why did you buy that particular stock? That particular futures contract? Obviously, you bought it because you thought it was going up. Were you sure it was going up? Of course not! Unless you have access to some kind of insider information, you can never be sure. All you can ever say is that the stock or futures contract will be more likely to go up than go down.
In essence, then, all trading decisions are based on the laws of probability.
Overcoming the Subjective Nature of the Process
The problem with saying that a stock is more likely to go up than down is that this is a very subjective judgment—and the theoretical pricing models don’t like subjective inputs. The models say we need to assign actual numbers—specific numerical probabilities—to the possibility of the stock going up or to the possibility of the stock going down. So, how do you derive these specific numerical probabilities?
To illustrate, I’ve created a very simple situation. Assume there is an underlying stock or commodity that’s trading at a price of 100. Then let’s say that, at some future date—which we’ll call “expiration”—this security could take on one of five prices, ranging from 90 to 110. I’m also assigning probability to each of those five outcomes—10 percent, 20 percent, 40 percent; then 20 and 10 again—as shown on the scale in Figure 2, following.
FIGURE 2
Obviously, this example is overly simplified, but it’s best to start from a very simple point for the sake of clarity.
Now, suppose I go into the market and buy the underlying contract, the underlying security. If I were to ignore transaction costs, interest rate considerations, slippage—all the other real-world things we have to deal with—could I actually calculate what I might expect to get back on this contract?
The answer is yes—at least as it relates to calculating all of the likely possibilities.
Here’s how it would work in this particular case. Ten percent of the time, the price of contract at expiration will come up 90. Twenty percent of the time, it’ll come up 95; 40 percent of the time, it will come up 100; and so on, up to 110, where it will once again wind up 10 percent of the time. In other words, what we’re doing is taking the probability that the contract will wind up at each of the five possible closing prices, and then totaling these probabilities. When we do that, you see that the total turns out to be 100. See Figure 3.
FIGURE 3
