From the August 01, 2008 issue of Futures Magazine • Subscribe!

Option Strategies for Directionless Markets

By Anthony Saliba

Bloomberg Press

208 pages, $39.94

Individual chapters analyze and explain in detail the four principal option strategies featured in the book: the butterfly spread, which Saliba helped popularize decades ago, the condor, the iron butterfly and the iron condor. Each chapter starts with a thorough introduction to the basics and then adds variations and contingencies. Crisp graphics and instructive worksheets illustrate the mechanics and logic of each strategy.

Two chapters are devoted to the options statistics famously known as the Greeks: delta, gamma, theta, and vega. Saliba shows how these defining parameters of option price behavior vary by time, implied volatility and proximity of the underlying to the strike price. An omnibus chapter is devoted to hybrid-option structures like broken-wing butterflies, pterodactyls and iron pterodactyls. Each chapter concludes with a helpful summary. All discussions of option logic and math end with a detailed quiz to test your understanding. You don't have to be a math whiz to answer the questions, but you’ll most likely need a calculator.

Where appropriate, Saliba uses his technical skills and vast experience to pour cold water on some widely held but misplaced beliefs about options. For instance, contrary to the wishful thinking of some fans of credit spreads, Saliba shows that the risk, reward and breakeven levels are identical for a synthetically equivalent debit spread. Saliba uses the same expertise to debunk the idea that you have to be an options quant to trade spreads. "It is not necessary to have a strong understanding of the Greeks...overanalyzing the Greeks can sometimes be counterproductive."

The final chapter consists of an absorbing interview with Saliba himself. Here the author recalls highlights of his days on the trading floor while sharing unique insights and perspectives on spread trading. All in all, a welcome coda. An appendix offers a "final exam" consisting of 100 questions and exercises and an answer key. A second appendix offers a useful glossary.

All the spread methods Saliba discusses are optimal for directionless markets, meaning the strategies profit from positive time decay. So how do you know when a market is poised to go sideways? Saliba doesn’t really say. He suggests using technical tools such as bar charts, candlesticks and Fibonacci retracement levels, among others. Saliba says little about how to implement these methods. Not only do you need to forecast price action, but the projected time frame needs to be factored in. No word on how to do that either.

Saliba’s prose is a model of clarity and rigor. In the nearly 200 large-format pages I could not find a single misspelling. Options Strategies for Directionless Markets is a welcome survey of advanced spread techniques from one of the foremost authorities in the field.

Nelson Freeburg is editor of Formula Research, a financial letter that builds and tests quantitative timing models for stocks, bonds, and commodities. Formula Research serves systematic traders and institutional money managers in 27 countries.

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