Friday, March 19, 2010

Caplan, The New Option Secret: Volatility

Unlike so many authors of trading books who take a single mediocre idea, stretch it and then garnish it with boilerplate ideas, David L. Caplan is a man of few words. He says what he has to say, illustrates his trading ideas with charts, and then stops. In the case of The New Option Secret: Volatility (1996, available through Traders Press) he compromises to produce a full-length book. His text makes up the first half of the book. He then turns the stage over to other experienced option traders, reprinting articles and excerpts from books on volatility. (Well, yes, he does include some of his own work in this section.)

Caplan trades options on futures, so not all of Caplan’s ideas translate perfectly into the stock options market. That caveat aside, Caplan offers six trades for the off-floor trader. (1) A neutral option position, best executed when option volatilities are high to medium and the market is trading in a range. Here the trader would sell an OTM put and an OTM call in the same expiration month. (2) The free trade, appropriate for a low option volatility environment in a trending market. The strategy: buy a close-to-the-money call or put; if the market moves in the intended direction, later sell a much farther OTM call or put at the same price. (3) A ratio spread, designed to take advantage of a premium disparity between option strike prices. This trade, which consists of buying a close-to-the-money option and selling two or more options farther OTM, benefits from a mildly trending market and high volatility in OTM options. (4) A calendar spread, appropriate when there is a premium disparity between the option months and high volatility in the front month. Here trend is not so important as long as the trader believes that the front-month option that he sells will not be ITM at expiration. (5) An ITM debit spread, buying an ITM or ATM option and selling a farther OTM option. The strategy here is to take advantage of the premium disparity between strike prices in a trending market. (6) A no-cost option where the trader buys a near-the-money option and sells a higher-volatility OTM put and call. This trade attempts to exploit strong technical support and resistance levels.

Caplan’s general game plan in all of these trading strategies is to “combine the comparative volatility level with the technical pattern of the underlying market to determine whether a ‘special circumstance’ or ‘favorable situation’ exists.” (p. 48) He explores each of these trading strategies in turn, illustrating them with ample, easily readable charts. He concludes his text with an overview of types of volatility, a section on the Greeks, and what he describes as trading gems and tidbits.

Caplan’s book is neither theoretical nor technical and it’s decidedly nonmathematical. What it offers are practical suggestions for a person setting out to trade options on futures.


  1. Just to say I love your blog and I follow every article, hope to read as many books as you some day.