Business

How to Trade Options – Book Review – Sheldon Natenberg, Volatility and Option Pricing

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As with most books on the subject of trading options, the amount of material that needs to be processed can be overwhelming. For example, with Sheldon Natenberg’s Option Volatility and Pricing, that’s about 418 pages to digest.

There are proper reader reviews on Amazon and Google Book Search, to help you decide if you’ll get the book. For those who have just started or are about to read the book, I have summarized the basics in the larger, essential chapters to help you read them faster.

The number to the right of the chapter title is the number of pages contained in that chapter. It is not the page number. The percentages represent how much each chapter makes up out of the 418 total pages, excluding appendices.

1. The language of options. 12, 2.87%.

2. Elementary strategies. 22, 5.26%.

3. Introduction to Theoretical Price Models. 16, 3.83%.

4. Volatility. 30, 7.18%.

5. Use of the theoretical value of an option. 14, 3.35%.

6. Option values ​​and changing market conditions. 32, 7.66%.

7. Introduction to Diffusion. 10, 2.39%.

8. Volatility spreads. 36, 8.61%.

9. Risk Considerations. 26, 6.22%.

10. Bullish and bearish spreads. 14, 3.35%.

11. Arbitration Option. 28, 6.70%.

12. Early Exercise of American Options. 16, 3.83%.

13. Coverage with Options. 16, 3.83%.

14. Revised volatility. 28, 6.70%.

15. Futures and options on stock indexes. 30, 7.18%.

16. Spread between markets. 22, 5.26%.

17.Analysis of position. 32, 7.66%.

18. Models and the Real World. 34, 8.13%.

Focus on chapters 4, 6, 8, 9, 11, 14, 15, 17, and 18, which make up about 66% of the book. These chapters are relevant for practical business purposes. These are the key points of these focus chapters, which I am summarizing from the perspective of a retail options trader.

4 Volatility. Volatility as a measure of velocity in the context of the instability of the price of a given commodity in a particular market. Despite its shortcomings, the definition of volatility is still based on these assumptions of the Black-Scholes model:
1. The price changes of a product remain random and cannot be designed, making it impossible to predict the direction of the price before its movement.
2. Percentage changes in product price are normally distributed.
3. Because percentage changes in product price are counted as continuous compounding, the product price at expiration will have a log-normal distribution.
4. The mean of the lognormal distribution (mean reversion) is found at the forward price of the commodity.

6 Option Values ​​and Changing Market Conditions. Use of Delta in its 3 equivalent forms: Exchange Rate, Coverage Ratio and Theoretical Position Equivalent. Treatment of Gamma as the curvature of an option to explain the opposite relationship of OTM/ITM strikes with the ATM strike having the highest Gamma. This is the inverse Theta-Gamma relationship, as well as Theta being synthetically intertwined as a long dip and a short premium with implied volatility, as measured by Vega.

8 Volatility Spreads. Emphasis is on the sensitivities of a Ratio Back Spread, Ratio Vertical Spread, Straddle/Strangle, Butterfly, Calendar, and Diagonal to interest rates, dividends, and the 4 Greeks with specific attention to the effects of Gamma and Vega.

9 Risk considerations. A sobering reminder to select the spreads with the lowest aggregate risk spread versus the highest probability of benefit. Aggregate risk measured in terms of Delta (directional risk), Gamma (curvature risk), Theta (downside/premium risk) and Vega (volatility risk).

11 Arbitration Option. Synthetic positions are explained in terms of building a risk profile equivalent to the original spread, using a combination of unique options, other spreads, and the underlying product. Clear warning that the transformation of operations into Conversions, Reversals and Adjustments is not without risk; but it may increase the shorter-term risks of the trade even as the longer-term net risk is reduced. There are important differences in the cash flows of long options versus short options, which arise from the unique bias bias of a product and the interest rate built into call options, making them disparate from option options. sale.

14 Revised volatility. The different expiration cycles between short-term options and long-term options create a long-term average of volatility, a mean volatility. When volatility rises above its average, there is a relative certainty that it will return to its average. Likewise, reversion to the mean is very likely as volatility falls below its mean. The gyration around the mean is an identifiable characteristic. Discernable volatility characteristics make it essential to forecast volatility in 30-day periods: 30-60-90-120 days, as the typical term is short credit spreads between 30-45 days and long debit spreads between 90 days. -120 days. Reconcile implied volatility as a measure of the consensus volatility of all buyers/sellers of a given commodity, with inconsistencies in historical volatility and predictive constraints on future volatility.

15 Stock Index Futures and Options. Effective use of indexing to de-risk individual stocks. Different treatment of risks for equity-settled indices (including impact of dividends/fiscal year) from cash-settled indices (non-dividends/fiscal year). Explains the rationale for the theoretical price of stock index futures options, as well as the price of the futures contract itself, in determining which is economically viable to trade: the futures contract itself or the options on the futures.

17 Analysis of positions. A more robust approach than simply looking at the Delta, Gamma, Vega and Theta of a position is to use the relevant theoretical price model (Bjerksund-Stensland, Black-Scholes, Binomial) to test date change scenarios (daily/weekly). before expiration, percentage changes in implied volatility and price changes within and near +/- 1 standard deviation. These factors that feed the scenario tests, once plotted, reveal the relative proportions of the Delta/Gamma/Vega/Theta risks in terms of their proportionality that impacts the Theoretical Price of specific strikes that make up the construction of a spread.

18 models and the real world. It addresses the weaknesses of these core assumptions used in a traditional pricing model: 1. Markets are not fluid: Buying/selling an underlying contract has restrictions in terms of tax implications, funding constraints, and transaction costs. 2. Interest rates are variable, not constant during the term of the option. 3. Volatility is variable, not constant over the life of the options. 4. Trading is not continuous 24/7: There are trading holidays that lead to gaps in price changes. 5. Volatility is linked to the Theoretical Price of the underlying contract, it is not independent of it. 6. Percentage price changes in an underlying contract do not result in a log-normal distribution of the underlying prices in the distribution due to Skew & Kurtosis.

To conclude, reading these chapters is not academic. Understanding the techniques discussed in the chapters should enable you to answer the following key questions. In the total inventory of your business account, if you are:

  • Net Long more Calls than Puts, have you forecast the implied volatility (IV) to rise, expecting the prices of the products traded in your portfolio to rise?
  • Net Long more Puts than Calls, have you predicted that IV will increase, expecting the prices of the traded products to go down?
  • Net Long an equal amount of Calls and Puts, have you forecast IV to rise, expecting prices to drift non-directionally?
  • Net Short more Calls than Puts, have you predicted that IV will fall? but, wait for prices to drop?
  • Net Short more Puts than Calls, have you predicted that IV will fall? but, wait for prices to rise?
  • Net Short an equal amount of Calls and Puts, have you predicted that IV will drop? but do you expect prices to drift non-directionally?
Home Kitchen

Bamboo furniture: a look at the history, properties and care of this popular alternative to wood

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Bamboo and Bamboo Furniture:

Wood is the best option when it comes to outdoor furniture materials, but unfortunately for many, it doesn’t come cheap. A single chair is rarely under $200, and a complete set can easily cost a few thousand dollars. But if you’re just looking for the look of wood, there are also much cheaper options, like bamboo. In fact, if you don’t consider furniture to be a big investment, bamboo can be much more practical. Keep reading to know more.

Bamboo history:

The Chinese were, and still are, the main users and producers of bamboo. Not surprisingly, the earliest found bamboo products, mostly household items and weapons, belonged to the Chinese around 7,000 years ago. Before paper was invented, the Chinese wrote on strips of bamboo, making it a key component in the spread of Chinese culture and language. Bamboo was also used for shoes, tiles, and coats, and remains a key ingredient in Asian cuisine.

In the West, people were finding more interesting uses for it. Alexander Graham Bell’s first telephone was made of bamboo, and Thomas Edison used a bamboo filament to create the world’s first light bulb. Bamboo mats, bowls, blinds, and ornaments also became popular. Today, the use of bamboo has spread to the arts (sculpture, musical instruments), construction (doors, floors, houses) and even alternative medicine (bamboo shoots and juice).

Uses and Properties:

Bamboo is actually a type of grass with a tough, woody stem that reaches its full height in about a year. This makes it an ecologically sound resource; that is, intensive collection has practically no impact on the environment. It is one of the fastest growing plants on earth, which is why it remains abundant despite having been used extensively for the past few thousand years.

Bamboo stem can be treated to form a lightweight yet extremely strong wood-like material. When the strips are glued together, the resulting material is ideal for building structures, such as pillars and scaffolding. Many traditional houses are made entirely of bamboo, and bamboo suspension bridges are still found in parts of Asia.

How it is grown:

Bamboo grows invasively, with the roots quickly forming an underground network that is mostly self-supporting. Nutrients from the leaves pass through the culms (visible stems) to the rhizomes, so the grove remains alive even if the bamboos themselves die out. In fact, the effort is often focused on controlling the growth of bamboo rather than propagating it. Bamboo growers prune the culms or install a physical barrier to prevent it from encroaching on adjacent plots.

The reeds are the commonly used parts in manufacturing. After harvesting, the stalks are cut lengthwise, boiled, and ground at the edges to flatten them. The strips are then glued together, either edge to edge or face to face. In the older style, they are usually laminated together in three layers to make them thicker and stronger. Finally, they undergo a final pressing and milling to ensure the structural bond, and are sometimes charred (exposed to high temperatures just below burning) for a richer, darker finish. The natural color is pale yellow to medium brown and is equally attractive.

Bamboo furniture:

Bamboo furniture has a light, earthy feel that’s perfect for open areas like porches, patios, and balconies. When built correctly it can have the same structural integrity as many hardwoods, but being a grass it is much lighter and more versatile. Bamboo is a great option if you like to move your furniture around or redesign your room from time to time.

Due to its high strength, bamboo makes a great storage piece, such as shelving and cabinets. The lighter varieties are commonly used for stools and dressers, while the sturdier ones make for larger tables and sofas. Many people accent their existing furniture with bamboo veneers, mats, and curtains.

The price of bamboo furniture has risen in recent years due to import costs, as well as increasing demand from environmentally conscious buyers. Some varieties cost almost as much as wood. If you want something more affordable, try bamboo veneer furniture, which comes with a solid wood interior and a bamboo outer shell.

Care and maintenance:

Bamboo is sensitive to water, so be careful not to wash it too much or leave it out in the rain. Wipe it from time to time with a dry or damp cloth and remove dust and sand with a mop or vacuum cleaner. Wipe up spills immediately to avoid stains and watermarks. Also avoid scraping with steel wool or any abrasive, as these can scratch the laminate and make it brittle.

You don’t have to be a serious conservationist to appreciate bamboo furniture. Its natural beauty makes it stand out against even the most expensive woods, and its neutral tones allow it to fit in with almost any theme. As long as you choose well and take good care of it, your bamboo furniture can offer you excellent value for money.