Buying and Selling Volatility by Connolly Kevin
Buying and Selling Volatility — a trading book that describes some really interesting type of trading — a volatility trading. It might be not very useful for Forex traders, because it involves the derivative trading (and it’s not very popular with Forex, spot trading is much more popular), but it will be interesting and useful to other traders and investors who don’t limit themselves to Forex only. Traditional financial trading consists of buying and selling certain instruments and closing the position when the price of the instruments reaches a desired profit level. All that such trader needs is the entry price and the exit price. The difference (positive or negative) is the trader’s profit or loss. Volatility trading offered by Connolly Kevin is different. Volatility trader buys or sells volatility through a complex system of hedged options and other derivative. The benefit of such method is that one can earn successfully on volatile markets without even paying attention to the entry and exit prices of the given instrument.
To make a profit, most individual investors and fund managers are forced to take a view on the direction of the price of something. The traditional investment strategy is to study all the aspects of the market place and decide on the value of the instrument under study. If the instrument is cheap, you buy, and if it is expensive, you sell. The traditional view taken is looking at only one dimension of a price sequence - the direction. Options can allow investors to completely ignore the direction of the price and to concentrate on the second dimension - the volatility of the price. It is possible to construct a portfolio containing a given stock and stock options and be completely indifferent to the direction of the price whilst profiting from the volatility of the price. This text explains, with the use of diagrams, how one can profit from the volatility (or lack of it) of the price of an instrument, irrespective of the direction of the price. It discusses the connection between volatility and options without recourse to complex maths.
Contents of Buying and Selling Volatility
1. An Introduction to the Concept of Volatility Trading
2. A Review of Some Basic Concepts
3. The Price Profile of Derivatives Before Expiry
4. The Simple Long Volatility Trade
5. The Short Volatility Trade
6. Using Put Options in Volatility Trades
7. Managing Combinations of Options
8. More Complex Aspects of Volatility Trading
Appendix: the software
Index.
