Volatility is the most elusive and difficult element involved in trading options successfully. Other factors, such as time and price, are known quantities. Volatility, on the other hand, is the least understood aspect of option pricing and strategies….yet the most important. Understanding volatility and its critical role enables an options trader to know when an option is over- or undervalued and provides far greater odds of trading profitably.

There is much written on volatility and its importance, but, until now, most of the available material has been shrouded in technical jargon and has provided little practical guidance in how to understand and use volatility to one’s advantage.

The author of this excellent book, Sheldon Natenberg, is legendary in the options world. Before reading it, I expected it to be highly technical and difficult to understand. To my delight and surprise, I found a “dummied down” presentation that is chatty, entertaining, exceptionally clear and eminently useful.

Not just one, but four types of volatility are covered in this book. Each is explained in clear and easily understood terms. A dominant theme is that an understanding of the theoretical pricing of options is the most important tool for an options trader. There are a number of theoretical pricing models. The most well known and widely used one, Black-Scholes, has always been a bit of a mystery to me...but no longer. Natenberg’s clear and understandable explanation of how it works and how to use it is a valuable addition to any option trader’s knowledge.

Probability plays a critical role in option pricing. In this book, I learned some valuable and easily used tips for calculating standard deviations (another subject formerly shrouded in mystery) in different time frames: Daily, weekly, monthly and annually. These guidelines alone are well worth the time and effort spent on this book…and they are only the tip of the iceberg of helpful and practical information I learned from it.

For instance, a weekly standard deviation is easily calculated by dividing annual volatility by 7.2. Adding and subtracting (+ / -) twice this figure to and from the current price gives a range within which there is 95 percent probability that prices will be contained for the next week.

The reader learns that strategies for trading volatility are a lot simpler than one might imagine…at least, in theory. One is simply trying to capture pricing discrepancies in options prices, when discovered, by constructing a delta-neutral position and adjusting it as needed until expiration of the option position. If this move is executed properly, a low risk profit is possible no matter which way the market moves.

Each chapter contains an insightful self-test consisting of a set of questions to make sure the reader fully understands the key points. All said, this book should shed light on this all important aspect of options trading for beginners and pros alike.

Review by
Edward Dobson, President
Traders Press, Inc.
Greenville, SC