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

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 book provides interesting data and examples of how option prices behave at the time of expiration and gives some example trade ideas and setups you can look for trading intaday. This is one of the few books/papers I have seen that actually discuss intraday option trading so it was a good read and worth the price. *The downside is that it was written 10 years ago with data from 2007 and 2008. The markets were structurally different back then with companies such as AAPL having strikes every $5 and monthly expiration cycles. Today AAPL has $2.5 wide strikes and weekly expirations. This dramatically impacts some of the trade ideas the author presents in the book so one would have to apply the same concepts but using today's market structure.

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.

In a very pithy and dense 'follow-up' to his previous "classic" The Volatility Edge in Options Trading: New Technical Strategies for Investing in Unstable Markets and a reasonably good workbook The Options Trader's Workbook: A Problem-Solving Approach , Augen provides a (very) serious options trader some key insights and strategies in dealing with options expiration dynamics. This book is not for the casual investor looking to make a quick profit and some of the strategies mentioned, as the author himself points out, could have implications regarding whether you could be classified as a day trader for tax purposes. The book is organized in three chapters. In the first chapter, the author explains three key observations regarding option pricing dynamics - volatility collapse, strike price pinning, and acceleration of time decay. He explains how each of these components contribute to option prices in the expiration week (and day) and provides some strong hints as to how to exploit them using some detailed examples. In the second chapter, the author provides some guidelines on the use of statistical models to identify potential candidates for implementing some of the strategies based on the three concepts mentioned above. The third chapter provides detailed descriptions of specific trading strategies on expiration Thursday and Friday. Now, the caveats. While the book provides a serious student of options and a trader some excellent insights, it is not clear how accessible the tools one may need to execute any strategies outlined (thankfully, the author doesn't provide or pretend to provide a formulaic approach, but rather a generic, well thought out framework with enough details that a serious reader can develop his/her own strategy based on risk profile). The effectiveness of these techniques cannot, obviously, be solely judged by the examples the book contains. So, one needs to take a patient approach in critiquing the book's approach - it will take some time to develop a trading strategy and enough data points to make any meaningful conclusions regarding the effectiveness. But, it is clear that a serious reader will benefit tremendously by being encouraged to look into a perhaps a niche area in option trading in a very systematic and through manner, which in itself can significantly improve one's experience in option trading. A must-have book for the serious options student/trader. (for what it is worth, I consider myself as a fairly conservative options trader, mostly focusing on spread strategies with a day job far away from the trading pits)

The book is VERY interesting, but in an academic sort of way. If you are looking for anything of practical value, look elsewhere. The author has done a lot of work - he collected an extensive (and expensive) historical database of minute-by-minute option prices, and then did an impressive analysis of this historical data. He presents relatively clearly the results of this data mining. The main finding are that "pinning" occurs routinely on expiration day (not a big surprise anyway, and you get no hint how to guess to WHICH strike price the pinning will occur, which is THE whole point) and that there seems to be a pattern as to how an option's prices goes to its intrinsic value (if any) over the course of Expiration Thursday and Friday. However, this is about it. There is some vague and general discussion how the results show that it SHOULD be possible to have some edge when trading on the day of expiration and 1 day previously, but no clear strategy emerges. It sounds intuitively appealing that on the last two days before expiration options fair-pricing algorithms can get a little out of focus - just enough for you to exploit. Sadly, this book does not show you how to get this edge. It shows examples that purport to show how the author got an edge trading in the past, but does NOT even spell out clearly which strategies are used. By reverse-engineering the examples given, I derived 6 strategies the author used: - ATM short straddle - Just-OTM Straddle - Ratio-Call (2x and 3X) - OTM ratio call (3x) - Long Straddle). I built two excel models, one for Expiration Friday, and one for Expiration Thursday, where I cut-and-paste the options prices on these two days at various times of the day, and the model then analyzes all combinations for of the 6 strategies I derived from the text and calculates the result of applying these strategies along the lines the book recommends : open a position around 10am, AND CLOSE IT AROUND 2pm-3pm; Sadly I have to report that after trying this for a few months on about 3-5 shares, I found no useful strategy - typically, IF I could guess in advance which strike prices to use, I could get an edge, but there is no pattern that i could find as to which of the 6 strategies would win with which combination of stike prices. (and if I COULD guess which strikes will be "correct" to make for which strategy, I could win on any day, using any strategy ... ) For example, on a recent expiration Friday I collected all option prices for AAPL, and analyzed for all 6 strategies: Strategy --> Winning Combination of Strike prices =========== =============================================== ATM short straddle --> Wins for strikes starting One "notch" below ATM and going up to 3 notches above ATM Just OTM Straddle --> Same as above (not surprising - for these strikes, this is the same strategy) 3x Ratio Call --> Wins for buying a call at 1-3 strikes below ATM and selling 1-3 strikes above ATM 2X Ratio Call --> Same as above (at this strikes, it IS the same strategy) OTM ratio Call --> Same as above (at this strikes, it IS the same strategy) Long Straddle --> Wins for strikes 1-3 below ATM on both legs So, to win, you have to (1) Correctly select the strategy from the above 6 possibilities and (21) select the correct combination of strike prices to use. If you can do that then You are smarter than me and probably rich enough to not be reading this review anyway ... Another problem, mentioned by another reviewer also, is that Fees and Bid/Ask spreads are ignored - and they are NOT negligible: The typical "win" is on the order of $0.30-$0.40. A round-trip (buy & Sell) fee for a 2-leg position is on the order of $25 (e.g. $12.95 is the minimum fee at OptionsXpress). For a 10-contract position, assuming I win $0.50 per share, the total win will be $500, and just the fees are 5% of that. So - you will have to trade LOTS of contracts, which is not a recommended situation for Risk-management. (A 10 contract position on a $20 stock is already a $20,000 position) Bid-Ask Spreads make this much worse, and larger positions will not fix them. Assume a bid/Ask spread of $0.25 (not a rare thing) and assume you will be able to open the position at about mid-point of this, but when you close, you have to pay at the bid/ask (and remember you are closing late in the day of expiration Thursday or Friday, where even the author says Bid/Ask spreads are likely to widen). So, a round-trip (open/close) will cost you about 50% of the Bid/Ask spread. in this example, this means it costs you about $0.125 per share - leaving you only $0.375 from the $0.50 you were hoping to gain. Add the two effects together, and you find that if all goes well, you will get $350 out of what was supposed to be $500 gain - and again, this is *IF* all goes well ... --- I'd give it 3 stars on research quality and interest, but Given the above, I find the title (and the blurb) misleading, and am docking it one star. Bottom line - Academically interesting, but not practical.

This is a very interesting book and is also educational for all option traders. But, as far as teaching a useful strategy for trading, .....that is the reason for only three stars. If you have never heard of straddles or strangles in options, then this book is definitely not for you. It is written for the experienced (very experienced?) options trader. And, even if you are experienced, you will walk away wondering how you can best use this strategy. The book is an interesting read, but is heavily laced with statistically models that again point to the experienced options trader. After I finished the book I went to the internet to see if Jeff Augen had a web site that would perhaps get into the details on how to better use this strategy to actually trade, but could not find anything. I plan on rereading this book and then try to use it for actual trading after I do a lot of "paper trading". If you are new to options, this book is not for you. Trade options seriously for a few years and then come back to it.

Unless I am missing something, this is pretty much the only book on this subject. And what a subject it is. Most option traders are desperate to get out on expiration day if they still hold same month options; this author says this is the day to get in! I plan to use his strategies to see if they work; based on my previous experience, I believe that they will as most options are absolute true value on Friday morning of expiration day and even a small underlying stock price change does impact the option price dramatically. An excellent book, well worth reading. I would have liked to see slighty clearer language and perhaps better summaries at the end of each chapter. However a valuable addition to the subject of options.

This book is very dense and thorough. Although weekly expiry choices are now available the same principles that Augen speaks. The author gathered some very granular data about intraday option prints which is hard to come by historically and really applied it in application for this book. Yes the book does have actionable strategies that experienced option users can apply. This book is not for beginners or even mid level users of options as the comprehension of concepts requires a thorough understanding of many dynamics ranging from extrinsic value compression/expansion, implied volatility crush and general theta decay and being able to loop all these concepts together in sync instead of understanding in singular form is vital to get the value from the book.

Va dans des détails insignifiants pour la plupart des traders. C'est une étude minute par minute du comportement des options. Dans la vraie vie, je doute qu'un trader puisse en tirer des enseignements valables. C'est d'un intérêt pour ceux qui dans les académies examinent à la loupe le comprtement des options.

Die Idee sich für die letzten beiden Tage das Verhalten von Optionenpreisen genauer anzuschauen ist sicher interessant. Laut dem Autor tretten bei Stock-Options 3 Effekte auf: Price-fixing entlang den Strikes, Implied-Volatility-Collapse und ein starker Time-Decay. Der letzte Effekt ist unbestritten. Price-Fixing bedeutet: Sind die Strikes z.B. 100, 105, 110, dann bewegt sich der Kurs von Aktienen mit hohen Optionenvolumen beim Expiry (3ter Freitag) mit hoher Wahrscheinlichkeit im Bereich dieser Strikes. Das Derivat bestimmt den Preis des Underlyings. Bei Futures geht man ebenfalls davon aus, dass primär der Future den Spot bestimmt. Allerdings kann Augen nur für 5 größere Aktien einen signifikanten Effekt nachweisen. Nachdem der Untersuchungszeitraum kurz ist, kann dies auch reiner Zufall sein. Man braucht nur genügend Werte hernehmen und bekommt immer ein paar Zeitreihen, die mit dem Ergebnis der Superbowl, dem Ausgang von Cambridge-Oxford oder der Butterproduktion in Bangladesh hoch korrelieren (Letzteres war in den 1990er Jahren beim S&P-500 der Fall). Ich habe nur detaillierte Daten für den S&P-500. Bei einem breiten Index tritt dieser Effekt logischer Weise nicht auf. Der Implied-Volatility-Collapse sollte beim S&P-500 aber genauso stattfinden. Tut er aber nicht. Ganz im Gegenteil, die Implied-Volatility nimmt kurz vor Expiry stark zu. Das ist auch logisch. Die Implied-Volatility basiert auf Black-Scholes. Im Black-Scholes Model diffundieren die Kurse. Es gibt keine Sprünge. In einem kurzen Zeitraum kommt eine Diffusion nicht weit. Tatsächlich gibt es aber auch Sprünge (bei Aktien vor allem nach unten). Die höhere Implied-Volatility kompensiert die im Model nicht berücksichtigte Sprungkomponente. Jump-Diffusion Modelle erklären die Optionenwerte kurz vor Expiry relativ gut. Laut Klappentext basieren die Untersuchungen von Augen auf Methoden in der Bioinformatik. Das dürfte eine Werbedurchsage sein. Wenn er solche Methoden verwendet hat, dann stellt er sie im Buch nicht dar. Es schaut vielmehr nach brute-force Durchackern aller möglichen Daten mit ziemlich primitiven Methoden (Excel) aus. Die Ergebnisse werden auch nirgends auf ihre statistische Zuverlässigkeit getestet (siehe Superbowl). Ein Minimum wäre ein Out-Of-Sample Test. Trotz dieser Kritik gehört das Buch aber noch zu den erfreulicheren Veröffentlichungen auf dem Trading-Gebiet. Es lohnt sich immerhin über die Ideen das Autors genauer nachzudenken und eigene Untersuchungen anzustellen. Ungeschaut würde ich die Ergebnisse aber nicht übernehmen.

La verdad que aunque sea en inglés, tiene una lectura fácil. Jeff Augen es un verdadero crack en el mundo de las opciones financieras y merece la pena saber cómo trata su operativa en la expiración de las opciones. Explica muchas variables de su operativa aunque faltan detalles más extensos y creo que da las explicaciones justas para que luego tú trabajes y pruebes esas técnicas, ya que de por sí va a ser difíciles de aplicar desde el pirmer dia. Aconsejable para conocedores de las opciones financieras en un nivel medio alto, nivel medio de inglés y mucha mucha paciencia y dedicación.

Excellent book in a brief summary has explained finer points about the intricacies of expiry day trades Really liked the book

useless ebook...avoid