the options edge winning the volatility game with options on futures - mcgraw hill

Also by William R Gallacher Winner Take All THE OPTIONS EDGE McGraw-Hill New York San Francisco Washington, D.C Auckland BogotP Caracas Lisbon London Madrid Mexico City Milan Montreal New Delhi San Juan Singapore Sydney Tokyo Toronto Library of Congress Cataloging-in-Publication Data Gallacher, William R The options edge : winning the volatility game with options on futures I William R Gallacher p cm ISBN 0-07-038296-4 Commodity options I Title HG6046.G278 1998 98-11804 332.63'28 &2 CIP Irwin/McGraw -Hill A Division of% i z McGrmHillCompanies Copyright O 1999 by The McGraw-Hill Companies, Inc All rights reserved Printed in the United States of America Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means or stored in a data base or retrieval system, without the prior written permission of the publisher ISBN 0-07-038296-4 The sponsoring editor for this book was Stephen Isaacs, the editing supenisor was John M Morriss, and the production supervisor was Suzanne W B Rapcavage It was set by The Publishing Services Group Printed and bound by R.R Donnelley & Sons Company McGraw-Hill books are available at special quantity discounts to use as premiums and sales promotions, or for use in corporate training programs For more information, please write to the Director of Special Sales, McGraw-Hill, 11 West 19th Street, New York, NY 10011 Or contact your local bookstore This book is printed on recycled, acid-free paper containing a minimum of 50% recycled de-inked fiber What can be done with fewer is done in vain with more -William of Ockham CONTENTS Preface ROADS LESS TRAVELED FAST FORWARD OCKHAM'S EQUATION THE WORD OF GOD THE EMPEROR OF CHINA'S NOSE PHANTOM OF THE OPTION THE PROMISED LAND BORN AGAIN THE ARMCHAIR BOOKMAKER REFERENCE 10 VOLATILITY PROFILES Index PREFACE The Options Edge will most likely appeal to readers with some practical experience in the trading of options It has been written, however, to be accessible to inexperienced traders who have a strong desire to understand the workings of the options market Compared with other technical books on the subject, The Options Edge is rather sparing in the use of algebra and complex statistical formulae However, the book does delve deeply into the principles of statistical inference It also analyzes a great deal of data, but data structured in a way that anyone with an affinity for numbers should find easily digestible The author takes it for granted that anyone interested in options is interested in numbers Whereas much of what I have to say applies to options in general, including stock options, the findings of The Options Edge derive from, and are specifically relevant to, options on commodity futures Before writing this book, I had to spend much time and effort constructing a data base from which to draw conclusions This data base is included in full at the end of the book and may prove useful to other researchers who wish to check out, statistically, for themselves, questions they may have about different option trading strategies I would like to thank my fellow trader, Stephen Clerk, for his review of my manuscript in development, and Jurgens Bauer for his hands-on lesson at the option pit of the New York Cotton Exchange Bill Gallacher S EP T EM B E R , 1998 P A R T O N E OPTION BASICS VOLAT~L~~ PROFILES 59 COFFEE 1996 fp Mar 18 Mar 19 Mar 20 Mar 21 Mar 22 Mar 25 Mar 26 Mar 27 Mar 28 Mar 29 Aprl Apr2 Apr3 Apr4 Apr8 Apr9 Apr 10 Aprll Aprl2 Aprl5 Aprl6 Apr 17 Aprl8 Aprl9 Apr 22 Apr 23 Apr 24 Apr25 Apr 26 Apr 29 Apr30 May May May May May May May May 10 May 13 May 14 May 15 12140 11960 11825 12055 12025 11975 12400 12230 12195 11600 11505 11640 11590 11580 11410 11515 11860 11710 11520 11490 11555 11725 11885 11830 13095 12690 12700 12545 12695 12250 12445 12700 12730 12755 12520 12640 12875 12700 12705 12605 12665 12645 May 16 12870 May 17 May 20 May 21 May 22 May 23 May 24 May 28 May 29 May 30 May 31 Jun 12865 12600 12420 12045 11785 11765 11685 11730 11585 11610 11255 rnax s M iv fp Jun Jun Jun Jun rnax s td iv 11340 11385 11305 11535 July 96 option expires May 20 12435 1275 1260 2534 Mav 21 12255 1318 1148 2451 ~ a22i May 23 May 24 May 28 May 29 May 30 May 31 Jun Jun Jun Jun Jun Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 Jun 24 Jun 25 Jun 28 Jun 27 Jun 28 Jul Jul2 Jul5 Jul Jut Jul 10 Jul 11 Jul12 Jul 15 Ju116 Jul17 Jul18 Jul 19 Jul22 Jul23 Jul24 Jul25 Jul 26 Jul29 53 52 55.98 55.48 LEGEND: fp = futures price, rnax r closest strike high option price, = closest strike low option price, s = price corrected at-the-money-straddle, td = number of trading days till expiry, iv = Implied volatility COFFEE 1996 fp max s M iv Jut30 Jul31 Aug Aug 10525 10640 10670 10750 September 96 option explres Jull5 Jull6 Ju117 Jull8 Jull9 Jul22 Jul23 Jul24 Jul25 Jul26 Jul29 Jul30 Jul31 Aug Aug2 Aug Aug Aug Aug Aug9 Aug12 Aug13 Aug14 Aug15 Aug16 Aug 19 Aug 20 Aug2l Aug 22 Aug 23 Aug 26 Aug27 Aug 28 Aug 29 Aug30 Sep3 Sep Sep5 sep6 Sep9 Sep 10 Sep 11 Sep 12 Sep 13 Sep 16 Sep 17 Sep 18 Sep 19 Sep 20 10120 9805 10165 10450 10275 9855 9870 9630 9725 9830 9955 9970 10065 10100 10160 9890 10020 10030 10710 10610 10715 11175 11100 11115 11155 11330 11505 11700 12080 12255 12520 11920 11655 11705 11825 11330 11280 11160 11290 11120 11130 10690 10520 10470 10535 10585 10440 10360 10360 fp Sep 23 Sep 24 Sep 25 sep 26 Sep 27 sep 30 Octl Oct2 Oct3 Oct4 Oct7 Od8 Od9 O d 10 Oct 11 Oct 14 Oct 15 Oct 16 Oct 17 Oct 18 O d 21 06 22 06 23 Oc2 24 Oct 25 01328 013 29 0630 O d 31 Nov I 10455 10800 10645 10570 10525 10295 10475 10540 10745 loge0 11270 11250 11355 11490 11630 11510 11420 11220 10990 10910 11300 11760 11930 11745 11600 11910 11635 11915 11720 11725 maw 500 465 s M iv 962 931 934 924 29 34.18 520 420 28 33.20 600 360 27 33.79 500 430 26 34.29 465 440 903 25 34.32 590 345 908 24 36.02 400 375 773 23 30.77 420 385 802 22 32.45 556 303 830 21 33.73 419 400 817 20 33.29 19 18 17 16 15 14 13 12 11 10 December 96 option explres Oct7 Octe Oct9 Oct 10 Oct 11 Oct 14 Oct 15 Oct 16 Oct 17 Oct 18 Od 21 0622 Oct 23 Oct 24 Ocl25 Oct 28 Oct 29 Oct30 Oct 31 Nov N V4 O Nov Nov LEGEND: fp = futures price, max = closest strike high option price, rnin = closest strike low option price, s = price corrected at-thamoney-straddle, td = number of trading days till expiry, iv = implied volatility V O M ~ L ROFILES PI ~ 26 COFFEE 1996 fp Nw7 Nw8 Nov 11 N w 12 NW13 Nov 14 Nov15 Nov 18 Nov 19 Nov20 NOV21 Nov 22 Nov 25 Nov 26 Nov 27 Dec2 Dec3 Dec4 Dec5 Dec6 Dec9 Dec 10 Dec 11 Dee 12 Dec 13 Dec 16 Dec 17 Dec18 Dec 19 Dec20 Dec 23 Dec 24 Dec27 Dec30 Dec31 Jan2 Jan Jan Jan7 Jan8 Jan Jan 10 Jan 13 Jan 14 Jan 15 Jan 18 Jan 17 Jan 20 Jan 21 Jan 22 Jan 23 Jan 24 Jan 27 Jan 28 Jan 29 Jan 30 11235 11175 10910 11045 11135 11240 11430 11265 11385 11310 10910 10950 10780 10810 10775 10805 10510 10420 10345 10325 10580 10820 10810 10985 11120 10905 10990 11190 11020 11215 11310 11475 11820 11595 11890 11665 11625 11405 11935 11890 11935 11980 11845 12220 12260 12305 12400 12925 12965 13530 14005 13690 13660 13950 14460 14030 fp mln 510 490 575 580 550 475 580 485 525 465 495 522 405 390 415 440 471 440 420 410 390 365 365 490 440 475 490 405 455 340 345 450 398 395 335 Jan 31 Feb3 Feb4 Feb5 Feb6 Feb max s M iv 13840 14565 14745 14455 15080 15105 March 97 option expires LEGEND: fp = futures price, m u = closest strike high option price, = closest strike low option price, s = price corrected at-the-money-straddle, td = number of trading days till expiry, iv = implied volatility SUGAR Basedon Calendar month Year JANUARY FEBRUARY 1993 1993 1993 1993 MAY Option h V 1003 FEH - JUNE JUL~ AUGUST SEPTEMBER C~%%R- NOVEMBER DECEMBER 1993 1993 1993 1903 1993 1993 h V Jul Jul Oct Jen Mar Mar 1100 1050 1050 JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER Mar Mav Jul Jul Jul Oct JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY Mar Mav JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER 1050 1250 15 20 1050 lo o0 Mav Mav Jul Jul Jul SEPTEMBER OCTOBER NOVEMBER DECEMBER 850 850 Jan Jan JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUQUST SEPTEMBER OCTOBER NOVEMBER DECEMBER AUGUST Nearest strike & a Jan Nw Jan Mar Mar Oct Jan Jan Jan Mar Mar Mw Jul Jut Oct Oct - Oct Jan Jan Mar Mar Mav ZV Jul Oct Oct Oct Jan Jan Jan Mar Mar 950 Implied volatility 24.22 23.29 35.33 33.63 42.92 38.15 26.46 24.16 23.18 28.26 30.08 Sugar Futures (1 996) Weekly HighlLow/Close Mar I -SUGAR 1996 fp Nov20 Nov 21 Nw22 Nov 27 Nov28 Nov 29 Nw30 Decl Dec4 Dec5 Dec6 Dec7 Dec8 Decll Decl2 Decl3 Decl4 Decl5 Dee 18 Dec 19 Dec20 Dec21 Dec22 Dec27 Dec28 Dec29 Jan Jan3 Jan Jan Jan10 Jan11 Jan12 Jan15 Jan18 Jan17 Jan 16 Jan19 Jan22 Jan 23 Jan24 Jan25 Jan26 Jan 29 Jan 30 Jan 31 Febl Feb2 max s td 1089 1079 1086 1097 1081 1092 1097 1130 1138 1129 1132 1126 1144 1138 1146 1137 1140 1143 1129 1138 1160 1154 1158 1154 1156 1160 1183 1184 1172 1189 1194 1173 1179 1167 1087 1109 1130 1149 1156 1176 1167 1172 1219 1248 1236 1215 1193 1204 I= ~ & Feb 1202 Feb8 1212 Feb 1201 March 96 option edres iv fp ma% s td iv Jan 22 Jan 23 Jan 24 Jan 25 Jan 26 Jan 29 Jan 30 Jan 31 Feb Feb Feb Feb Feb Feb Feb Feb 12 Feb 13 Feb 14 Feb 15 Feb 16 Feb 20 Feb 21 Feb 22 Feb 23 Feb 26 Feb 27 Feb 28 Feb 29 Mar Mar Mar Mar Mar Mar Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 18 Mar 19 Mar 20 Mar 21 Mar 22 Mar 25 Mar 26 Mar 27 Mar 28 Mar 29 Apr Apr Apr Apr Apr LEGEND: fp = futures price, max = closest strike high option price, = closest strike low option price, s = price conected at-themoney-straddle, td = number of trading days till expity, iv = implied volatilii VOLATILITY PROFILES 265 SUGAR 1996 fp max s td Apr9 AprlO Aprll Apr 12 1158 1163 1174 1162 May 96 option explcplrer, Mar25 Mar 26 Mar27 Mar 28 Mar29 Aprl 1137 1121 1118 1101 1113 1092 Apr4 Apr8 Apr9 AprlO Aprll Apr12 Aprl5 Aprl6 Apr17 Aprl8 Aprl9 Apr22 Apr23 Apr 24 Apr 25 Apr26 Apr29 Apr30 May May May May6 May May8 May May 10 May 13 May 14 May 15 May 16 May 17 May 20 May 21 May 22 May23 May 24 May 28 May 29 May 30 May 31 Jun 1106 1126 1104 1110 1126 1112 1119 1111 1116 1062 1058 1061 1066 1075 1056 1036 1041 1039 1033 1040 1051 1059 1062 1087 1078 1076 1080 1091 1093 1105 1142 1150 1139 1138 1122 1126 1101 1095 1102 1121 1147 2; z iv fp Jun Jun5 Jun Jun7 Jun 10 Jun11 Jun 12 Jun 13 Jun 14 max s td 1142 1135 1160 1158 1144 1180 1174 1168 1167 July option expires iv Ot b r co eMay 29 May 30 May 31 Jun Jun Jun Jun Jun Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 Jun 24 Jun 25 Jun 26 Jun 27 Jun 28 Jul Ju12 Ju15 Jul8 Jul Jul10 Jul 11 JUI 12 Ju115 Jut 16 Jul17 Ju118 Jul 19 Jul 22 Jul23 Jul24 Jul25 Jul 26 Jut 29 Jul30 Jul31 LEGEND: fp = futures price, mar = closest strike high option price, = closest strike low option price, s = price corrected at-the-money-straddle, td = number of trading days till expiry, iv = implied volatility SUGAR 1996 fp Augl Aug2 Aug5 Aug6 Aug Aug8 Aug9 Aug12 Aug13 Aug14 Aug15 Augl6 Augl9 Aug2O Aug 21 Aug22 Aug23 Aug 26 Aug27 Aug28 Aug 29 Aug30 -3 sep4 sep -6 sep9 Sep10 Sea11 sii12 Sep 13 Aug26 1135 Aug 27 1144 Aug28 1143 Aug 29 1143 Aug30 1148 Sep3 ,1171 sep4 1164 Sep5 1167 3: ;; ;: SeplO Sep 11 Sepl2 Sep 13 Cbp 16 S8p 17 S8p 18 Sep 19 &p20 -23 -24 Sep 25 max s M 1178 1171 1173 1164 1148 1137 1146 1159 1188 1181 I166 1164 1172 1181 1182 1185 1185 1165 1174 1173 1173 1178 1218 1212 1201 1200 1203 1205 1196 1189 1164 October 96 option expires 1173 1166 1187 1145 1141 1128 1130 1137 1121 1127 1104 1092 iv fr, max s M iv Sep 28 Sep 27 Sep 30 Octl Oct2 Oct3 Oct4 m m a od9 Oct 10 Oct 11 14 Octl5 Oct 16 Oct 17 Oct 18 Oct 21 Oct22 Oct 23 Oct 24 Oct 25 Oct 28 Oct 29 oa30 Oct 31 Nov Nw4 Nov5 NW Nov N w8 Nov 11 Nov 12 Nov 13 Nov 14 Nov 15 Nov 18 Nov 19 Nov 20 Nov 21 N w 22 NW 25 N w 26 Nov 27 Dec Dec3 Dec4 Dec5 Dec6 Dec9 Dec 10 Dec 11 Dec 12 D m 13 1073 January 97 option expires LEGEND: f = futures price, max = closest strike high option price, = closest p strike low option prim, s = price corrected at-the-money-straddle, td = number of trading days till expiry, iv = implied volatility V O L A ~ PRIO~ S L FILE 267 SUGAR 1996 fp Oct21 OI322 01323 Oct24 Oct25 -28 01329 -30 W31 Nwl Nw4 Nw5 Nw6 Nw7 Nov8 Nw11 Novl2 Nwl3 Nwl4 Nwl5 NWl8 NW19 N w 20 Nw21 Nw22 Nw25 N w 26 Nw27 Dec2 Dec3 Dec4 Dec5 Dec6 Dec9 DW 10 Decll Decl2 Dec l Decl6 Decl7 Dec 18 Dec 19 Dm20 DW 23 DW 24 Dm27 Dec 30 Dm31 Jan Jan3 Jan Jan Jan 1057 1063 1065 1066 1070 1054 1049 1047 1030 1036 1035 1033 1040 1048 1053 1055 1030 1048 1037 1035 1046 1069 1068 1059 1065 1088 1075 1066 1066 1027 1030 1031 1040 1030 1035 1042 1046 1073 1056 1077 1086 1071 1069 1075 1073 1089 1099 1100 1094 1108 1107 1096 1087 rnax s td iv fo Jan Jan 10 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 20 Jan 21 Jan 22 Jan 23 Jan 24 Jan 27 Jan 28 Jan 29 Jan 30 Jan 31 Feb Feb Feb Feb Feb Feb 10 Feb 11 Feb 12 Feb 13 Feb 14 max s td iv 1072 26 1064 25 1049 24 1051 23 1062 22 1057 21 1052 20 1035 19 1017 18 1017 17 1015 16 1024 15 1044 14 1041 13 1033 12 1039 11 1045 10 1042 1044 1058 1066 1060 1051 1063 1066 1064 1078 March 97 option expires LEGEND: fp = futures price, max = closest strike high option price, = closest strike low option price, s = price corrected at-the-money-straddle, td = number of trading days till expiry, iv = implied volatility I N D E X A Account diversification, 165 Advisory services, 14, 60 Arbitrage, 52 Armchair bookmaking, 168 Asked price, 55 At the market order, 156 At-the-money option, 12 correction factor for, 90-92 B Backgammon analogy, 116 Bauer, Jurgens, 156 Beardstown Ladies, Bell curve, 22 Bettor's payoff, 31 Bid price, 55 Billion dollar blowout, 170 Black, Fischer, 43, 44 Black-Scholes formula, 42, 55, 66, 82, 171 Boutique science, 131 C Call option: definition of, I-day at-the-money, 32-36 price parity of, 14, 41 Capote, Truman, 169 Cattle futures and options: case study of, 141-142 five-year volatility profile, 244 1996 volatility profile (chart), 245 1996 daily statistics, 246-249 Chicago Mercantile Exchange, The, 119 Choppy markets, 125 Cocoa futures and options: five-year volatility profile, 250 1996 volatility profile (chart), 25 1996 daily statistics, 252-255 Coffee futures and options: five-year volatility profile, 256 1996 volatility profile (chart), 257 1996 daily statistics, 258-261 Coffee, price change analysis of, 2328 Commission costs, 154, 160- 162 Common sense, principle of, Confirmation-bias syndrome, Corn futures and options, case study of, 140-141 five-year volatility profile, 238 1996 volatility profile (chart), 239 1996 daily statistics, 240-243 Correlation studies, Cotton futures and options: five-year volatility profile, 220 1996 volatility profile (chart), 22 1996 daily statistics, 222-225 Crash Monday, 146 Crude oil futures and options: case study of, 142-145 five-year volatility profile, 214 1996 volatility profile (chart), 21 1996 daily statistics, 216-219 D Derivative variable, 18 Diversification, 165 Dow Jones Industrial Average, 167 Dynamic writing strategies, 15126 E Education o a Speculator, f Equality of expectations, 11 Equity swings, 116 Execution costs, 154 Exit and entry costs, 158 Expectation: call option buyer's, 33-34 Expectation: continued equality of, 11 mathematical definition of, 31-32 negative, positive, Exponential smoothing, 131, 149, 170 F Fair value: of an at-the-money option, 40-4 concept of, 2, 32 expressed as mean absolute deviation, 37, 82 of 1-day call option, 32-37 False optimization, 133 Federal Open Market Committee, 137- 138 Federal Reserve Board: 137, 169 interest rate policy of, 137-138 Feynman, Richard, 64 Financial Analyst's ]ournul, The, 44 Fixed price order, 148 Frequency distribution: 22, 30 of coffee prices, 26-27 of silver prices, 26-27 Fudging the numbers, Full disclosure, principle of, Fundamental overrides, 134-151 Futures price: random nature of, 18, 23 temporary equilibrium, 18 G Gifford, Frank, Globex, 19 Gold futures and options: five-year volatility profile, 202 1996 volatility profile (chart), 203 1996 daily statistics, 204-207 Gold options, pricing of, 12-13 Greenspan, Alan, 51 Gross trading edge, definition of, 151 H Hedge funds, 169 Hidden costs, 158 High-tech psychology, 151 Hogs and Pigs Report, 71 Hypotheses: general testing of, 4, 1 testing of straddle writing, 102108, 119 testing for overvaluation, 133-134 using accurate data in testing of, 155 I Illiquid options, 154 Implied volatility, definition of, 55 Implied strike price, definition of, 102 In-the-money option, 12 Independent variable, 18 Index funds, 150, 166 Insider trading, 167 Interest on option premium, 115 J Japanese yen futures and options: five-year volatility profile, 196 1996 volatility profile (chart), 197 1996 daily statistics, 198-201 L Larry King Live, Limit order, 157 Logarithmic returns, 78-79 Lognormal distribution, 77 Long Term Capital Growth, 169 Lottery analogy, M Mad cow disease, 141- 142 Margin requirements, 10, 166 Market order, 156 Mathematical expectation, 1-32 McMillan, Lawrence, 62-64, 82 Mean absolute deviation: as primary estimator of volatility, 82-83 biased estimate of, 129-131 definition of, 26 in relation to call option price, 3537 relation to standard deviation, 38, 81-83 use in valuation tests, 126-132 Merton, Robert C, 43, 169 Million dollar formula, 4, 25, 43-46, 63 errors in, 47-51 downfall of, 169-17 Mutual funds, 150 N Natenberg, Sheldon, 66, 139 Negative expectation, 4, Negotiated commissions, 161 Neutralizing a problem option, 118, 159 New York Cotton Exchange, The, 66, 156 New York Stock Exchange, The, New York Times, The: reporting on OPEC intervention, 143-145 Niederhoffer, Victor, Nobel prize in economics, 43 Non-representative data, 127 Non-traded options, 154 Normal distribution: definition of, 20 examples of, 22-23 underpricing of options using, 48 Ockham, William of, 37 Ockham's equation, 41-42, 47, 5255, 68, 83, 95 for at-the-money straddles, 95-96, 170 OPEC, 143 Optimization, false, 133 Option: advisory services, 14, 60 expiry date, definition of, in film industry, 8-9 overvaluation, definition of, 14 phantom, definition of, 88 premium, definition of, price parity, definition of, 13 straddle, definition of, 89 strike price, definition of, 12 time decay of, 67 trading pit, 12 undervaluation, definition of, 14 writer, definition of, Option Volatility and Pricing Strategies, 66, 139 Options as a Strategic Investment, 62 Out-of-the-money option, 12 P Payoff, bettor's, Payout ratio, 108, 116-1 17, 126128, 131 Persian Gulf War, 144 Phantom strike price, 122 Phantom options: definition of, 88 calculation for, 92-96 outcome from writing, 102-108 Positive expectation, Price parity of at-the-money options, 14,41 Probability: distributions, 29 envelopes, 21 Put option: definition of, price parity, 14, 41 R Racetrack analogy, 31 Random variables, 22 Random walk, 39 Regression to the mean, 73, 75 Resistance level, 50 Resting order, 160 S S&P 500 Index future and options: five year volatility profile, 178 1996 volatility profile (chart), 179 1996 daily statistics, 180-183 volatility during market plunges, 145-151 Sample size, importance of, 128 Sampling error, 23-28 Scholes, Myron, 43, 169 Scientific method, Secular trends, 133, 146 Selectivity in writing strategies, 126128, 132-134 Settlement committee, 15 Settlement prices, 155 Silver futures and options: five year volatility profile, 208 1996 volatility profile (chart), 209 1996 daily statistics, 10-213 Silver, price change analysis of, 2627 Slippage, 153, 158, 165 Soros, George, Soybean futures and options: five year volatility profile, 226 1996 volatility profile (chart), 227 1996 daily statistics, 228-231 SPAN, 166 Square-root time relationship, 39, 68,97, 124, 150 Standard deviation: annualized, 82 definition of, 26 error in trending market, 79-8 of cocoa price changes, 77-8 Standard deviation: continued of coffee price changes, 26 of logarithmic returns, 79 of a normal distribution, 22, 34 of silver price changes, 26 Stocks in All Positions report, 139 Stop-loss order, 10, 119 Stop-loss protection, 10 Straddle, definition of, 88 Strangle, 145 definition of, 163 Strike price, definition of, Subliminal bias, 101 Sugar futures and options: five year volatility profile, 262 1996 volatility profile (chart), 263 1996 daily statistics, 264-267 Support level, 150 Surely you're joking, Mr Feynmun?, 64 Swiss franc futures and options: five year volatility profile, 190 1996 volatility profile (chart), 191 1996 daily statistics, 192-195 System trading, 101, 19, 134 T Technical analysis, 17 Trading edge, 53, 166 definition of, 151 Trading market, definition of, 19 Trading "volatility," 138 Treasury bond futures and options five year volatility profile, 184 1996 volatility profile (chart), 185 1996 daily statistics, 186- 189 Trending market, definition of, 19 Trigger levels, 121- 125 u U-factor, The, 136- 146 United States Department of Agriculture, 139 Unlimited liability, compensation for, 115 Unreflected uncertainty, 112, 136 v Volatility: calculation of implied, 55-58, 96 definition of historic, 74 definition of implied, 55 definition of market, 4, 60 implied versus market, 60-62, 67, 74-75, 128-134 Japanese yen example, 75-76 skew, 64 smile, 64 W Wall Street, 150-151 Wall Street journal, The: reporting on corn stocks, 140 reporting on hedge fund fiasco, 169-170 Wheat futures and options: five year volatility profile, 232 1996 volatility profile (chart), 233 1996 daily statistics, 234-237 Whipsaw, 161 Wanner Take All, 1, 164, 166 World Trade Center, 108 Writer's edge, definition of, z Zero-sum game, ... of Congress Cataloging-in-Publication Data Gallacher, William R The options edge : winning the volatility game with options on futures I William R Gallacher p cm ISBN 0-0 7-0 3829 6-4 Commodity options. .. put options A put option is in -the- money when the futures price is under the strike price An option with a strike price exactly equal to the futures price is said to be at -the- money and is the. .. from in -the- money strikes to out-of -the- money strikes and how the values of put options vary in the reverse direction Working across Figure 2-1 from left to right, note how the values of options