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You have made a good start. Once you understand that options are a trading
vehicle and not an investment item, you have made a start. All the standard
assumptions are made to expiration. That is one of the least profitable
assumptions. The winner uses the options to hedge, appreciate in value, or
in spreads with determinable profits over a predetermined period of time.
Options positions and volatility should be figured upon the time you intend
to hold them. What your system tells you is the appropriate holding time and
exit price. As they say, don't overstay your welcome. Ira.
cb wrote:
> 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
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