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OPT: Bk Rev.: The Options Edge by Gallagher



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I have just read The Option Edge by R. Gallagher. Always the "outsider",
Gallagher presents what I'm guessing is nonstandard thinking about
options. I have not digested how to use it fully. 

Arguably one should get a more standard interpretation first before
reading Gallaghers' so I may have erred in my choice, since I have not
read McMillin or Natenburg? yet.  (Incidently, Gallagher seems to rec.
Natenburg much more than McM.)

He states that some of the "probability" formulas are based on
assumptions (like normal distribuiton of price moves) that in reality
aren't true.

Anyway his arguement is that the option writers edge may not be as big
as sometimes advertised.  Overall indiscriminate strangle writing is
seen to be breakeven.  Writing only over-valued strangles gives a small
edge of about 10%.  His result is from empirical tests with one years
worth of data in perhaps 10-20 commodities.. writing at the money
strangles with no defensive strategies (in order to see if the options
are priced fairly).  He presents a variation of this with a defensive
strategy that increases the edge slightly.

He also makes a good arguement that the formula usually used for
"historical volatility" i.e., the actual vol. of the underlying, is
flawed in that it used the std. dev. of the price changes.  In a
trending market which goes +20 +20 +19, +20 the hist. vol would be very
small if based on std. dev. yet the market actually is moving a lot!

I'm sorry I'm not more of an option expert to be able to give a better
review. 

Conrad Bowers