Re: Day Trading Options Jeff Augen Free Pdf 32
Lora Ceasor
In Jeff Augen's Volatility edge, he often used a standard deviation plot to look for spikes. He also discussed it in managing basic option positions and using price spikes as triggers to enter. (it starts on page 113 of the actual book if you are interested in reading it). I post a brief synopsis below (straight from his book, because i have the eBook version).
generates a data series of the logarithmic ratio of previous bar's option price compared to the next one, so if it was based on hour on a day, it would be a series of [9am to 10am, 10am to 11am ... 3pm to 4pm].
Calculates the standard deviation of this logarithmic ratio of that bar-by-bar price over the last 20 bars (again, minute, day or hour, whatever you had it set on) and divides that by squart root of (20/20-1), or 1.025. Not sure what this derives, someone who's more well versed in statistics can pipe-in, but this is basically some derivative of the standard deviation of the last 20 bars of the price ratio.
M defines what is the expected move from the previous bar that's one standard deviation away. spike in terms represents a data series of the historical difference of the price bar changes from one to the next vs. the theoretical or expected price bar change at the time (you can think of it as comparing HV vs. IV except in the same sense of comparing the real option pricing change vs. the theoretical expected pricing change defined as being inside 1 std. deviation).
So basically the Jeff Augen entry method signals you to enter a option order when the current option pricing spikes above 1 std-dev calculated off the last 20 bars of price ratio's depending on what bar-setting you have it on,
Thanks Paul! I thought the length=20 was the same as the SMA or EMA length (which is usually in days). i'm usually using the hourly charts so 20 bars is just over 3 trading days. that's not a good enough sample size. i'm going to change the length to 70 which would work out to be about 10 trading days on the hourly bars.
The problem is I'm not sure if that's the way to represent the last close with the last last close in the previous bar; I haven't really played around too much thinkscript, but at least that's the idea,
I think each tick is when every time the option price changes and each bar is when every minute, hour passes? Since the script is calculated based on the bars, I think it should be every bar. But not sure if even each tick would be different.
Yea, it would be positive value. If it's negative, it'd be price drop. Not sure what Jeff Augen's price spike dictates, but if you want the price drop, you can modify the line where it calculates the currentSpike to be the absolute value difference,
The idea behind Jeff Augen's "Using Price Spikes as Triggers" is actually a pretty simple. He plots prices according to # of standard deviations away from the average prices for the past X peroids (you define the length in the study). So basically he's saying it's a good idea to use big up or down ticks to open or close positions.
I skimmed some of his books at the bookstore a long moon ago. However, I couldn't get sense of his strategy. Plus, he had a bunch of books, so it wasn't clear to me what is his core tenet of his trading strategy. It seems a lot of people follow his style, so I think I might go back and revisit one of his books.
For instance this morning i entered around 9:40 at 4.8 debit for the Aug monthly 470 call option because the downtick of 2.5 STD 60 minutes before market open, followed up 7 upticks all the way until market open. this is telling me there's going to be a strong uptrend right after market opens.
so i bought that call as soon as it opened and it was priced at around 4.6 but couldn't get filled so i moved it up until 4.8 and it got filled. around 9:40 there was 3 consecutive upticks with 2 of them greater than 2.0 STD and AAPL. this is strong exit signal. AAPL ended up around 478ish (from 476ish @ open) and the called was priced around 5.7 so i exited my position.
in hindsight it was probably better to buy the option with a bit more time in case AAPL is rangebound for the next few days. although if you look at the price spikes on AAPL, you are going to get some movement no matter what. since it's in a pretty strong uptrend recently i decided to be bullish along with the rest market and do it with calls.
for anyone that's wondering, i'm using the 5 minute, 5 day charts with the study set at 1950 periods (which corresponds to exactly 5 trading days). So i'm measuring the standard deviation on the price spikes based on the prices of the previous 1950 ticks (5 min per tick x 12 x 6.5 hours in a trading day x 5 days).
Thanks so much Mikael for this topic and information you are sharing. I'm new to the forum here and just really reading/watching what others are doing. I recently skimmed/read Augen's "Trading Options at Expiration" but haven't read his other books. I note from TOAE that he relies upon 2008 data. I was trading options in 2008 (new to it in 2007) and it was pretty easy to make money TOAE that year because of the high volatility in the market premiums were huge and declined like lightening in the last day (or two) before expiration. Some of the TOAE strategies that worked in that market environment wouldn't necessarily work today though.
basically, options lose the most value on the thursday evening and expiration friday. and many stocks exhibit a "pinning" effect on Friday. (he said it's because of institutional traders unwinding large complex positions or something), anyway not too sure of the exact reasoning behind it but he gave an example using google and said basically stocks tend to exhibit a pinning effect on the higher option strike on expiration fridays. (so for ex. if goog is trading at 912 friday morning, it is likely to trade at around 915 for the entire day.) so in this case, he's saying on friday it's good to short the expiring option to extract the last remaining value in it. so you'd short a OTM option on this day. Obviously if the IV is higher the more premium you are going to get so this strat would work better in the high IV environment, but i think it would still work in low IV environment you just won't get alot of premium.
the std bar thing is just the way he looks at price spikes and he describes a system to use it as an entry and exit signal. i think this kind of signal can work in any market type. the basic premise is since options are priced according to STD of the underlying price, whenever your underlying spikes up or down (2+ STD) you should use it as a entry or exit signal. most short term price ticks tend to be mean reverting, if you have an especially large down or up tick, it should revert back to the mean price. (not always but that's the idea). 2STD is quite a big spike (think about it, if the prices are normally distributed a 2 std spike only should happen about 4.5% of the times). obviously most stock prices are not normally distributed. the point is that is a pretty big up down tick and you can take advantage of the mean reverting trend. (you also need to assess not only based on this study but your other technical indicators, like MACD RSI etc.) since you have to pick a direction otherwise you can't use the spikes as signal. the downside is it's very hard to guess medium to long term direction, and i'm usually wrong on market predictions so i'm kinda of adapting this system to be way shorter term. thus using the 5m charts and trying to close trades within 1-3 days and keep position size small).
btw this system is very directional so it's not at all similar to the SO strategies. it's basically the same thing as trading stocks. if you have a big account you can use 1.0 delta options, but for expensive stocks that's too expensive for me so i'm using 30 delta otm options instead.
2. kinda of volatile (otherwise you will never get any good price spikes to work with on the short term, otherwise you have to go longer term and then time decay etc. all become problems, so i don't want to deal with that)
I am blown away by yours post. Its great. I'd like to adjust your Jeff Augen and your strategy to test at larger bar intervals (maybe 1 day even) because I can't really day trade because I'm not in front of my broker's software most of the day.
What really blows me away though is that I never new thinkorswim had a scripting language. That is AWESOME! Do you have any more information on this scripting language? Does ToS let you export any data?
I am on my second reading of Jeff Augens, "Volatility Edge in Options Trading" I highly recommend it because it will some great insight to our SO stategy. I am also beginning to anticipate what Kim is thinking and use the information to check my reasoning. Still have long ways to go. Does anyone suggest Augens other titles or books by other authors.
Yes, you can adapt the system to any length of time. Obviously your strategy will be different but the general idea is the same. In his book, he used the spikes as entry indicators for GS on a 1 day / 1 year graph.
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