The Option Trader's Workbook: A Problem-Solving Approach [Paperback]

Using a question/answer approach to teach the intricacies of options is a great innovation in Augen's book. The problems posed are interesting and tantalizing. But Augen is not very careful with the answers he provides in the book. Many of the questions require the reader to do some simple high-school arithmetic but Augen typically gives you a cryptic numerical value as answer, leaving you clueless as to how the value is derived, or whether you make a mistake somewhere doing all that arithmetic.

If Augen only provides the details of the intermediate steps in an answer, he may have lost less readers who were already perplexed by the challenging topic of options itself. Sometimes he may even have found quite a few preventable errors in his numerical answers.

When I read Page 32, the term "structure of volatility" was italicized. It took me another 46 pages before I found to my horror that Augen forgot to italicize the word "term" in front of the phrase. Page 109 would use 65 instead 365 days in a year for timeframe calculations. More grievous examples include such cases like stating that a straight line makes 45 degrees with the x-axis on a graph (in Page 139) when the angle doesn't look like 45 degrees at all, and worst, the x-axis is labeled volatility (values ranging from 0 to infinity) and the y-axis is in dollars. You get quite a few of such strange usage and sloppy editing, or cryptic arithmetic throughout the text. Other typos can be downright scary for novice readers, like Page 138's answer section talking about options that are "17% out-of-the-money" when actually they are in-the-money. Or when the put options in trade #4 on Page 168 mysteriously going to $0 at expiration when stock price goes below the put strikes; and the answer on Page 169 describes the put trade as "ratio call spread". It was pure despair when I first read it - before I figured out where the typo was. The end result of all these is quite a bit of unnecessary hardship.

Simple probability calculations using the Normal Distribution are found in many places of the text. But the author forgot to include a one-page Normal CDF table to teach a reader from first principles how to do the calculation himself; instead he keeps referring to Excel's built-in NORMSDIST() function or mysteriously quoting the final probability value without showing how this is derived - another unnecessary hardship for the poor reader.

Another ambiguity involves the use of 252 vs 365 days in volatility arithmetic. I was left without knowing which one to use from the first appearance of this issue in Page 25 and 48 and for the next 61 pages. The suffering only ends on Page 109 when the author gives you a rule about what occasions to use each.

Augen introduces his term of call premium "price distortion" percentage on Page 78 and 79. The upward-sloping curve (Figure 2.3) is the gist of the answer but its derivation remains mysterious to the reader. In other words, the answer wets your appetite but asks you to accept it on faith. You won't be able to answer a similar question yourself in the future because you don't know how.

The answers frequently generate more questions and confusion than necessary. Like on page 80, you find a cryptic sentence out of the blue - "The short side returns 37% more time decay than the correctly priced option." You can spend days chastising yourself for being so clueless about how to get to 37% no matter how careful you read and re-read the answer provided. Sloppy description would lead impressionable novices astray - like Page 162's "the stock is $25 out-of-the-money"; the author means the long-call option in the example, not the stock. Another example is the sentence on Page 140, "volatility changes are beneficial only if implied volatility is mispriced to the upside". How do you price volatility? Or is this about implied volatility causing the option premium to get mispriced? Do you mean the premium is too high? I don't know.

On Page 206, VIX option expiration is explained this way: "VIX options expire on the Wednesday that is 30 days prior to the third Friday of the month immediately following the expiration month." If you are confused by the words "prior" and "following" in the same sentence, you are not alone. Maybe the author could have stated that the first occurrence of the word "month" refers to the SPX option expiration month; the second occurrence of "month" refers to the VIX option expiration month. Is there a clearer way of describing this? I think so.

Augen sometimes bypasses the use of simple equations to make things appear less mathematical. But doing so actually makes the problem solving process more opaque. For example, Question #6 on Page 96 is basically a question involving high-school linear equation solving. But instead of just solving the simple equation, Augen gives a cryptic numerical answer of $44 in the very first sentence of the answer and then goes on to justify why this magical numerical value is correct. Yet more hardship and bewilderment for the poor reader.

At times, the author loses track of his actual definition of technical terms. For example, in the calendar spread section in Chapter 4, the author would define max profit to randomly include or exclude the accounting of a 2-cent 1-day-remaining short call in max profit calculation. You will find that Question #16 excludes 2 cents for max profit ($2.69); Question #25 includes 2 cents (max profit $4530 on Page 145); Page 147 Question #26 excludes 2 cents (max profit of $1440 instead of $1420 in the table); Question #29 includes 2 cents ($2.67 instead of $2.69 in the answer's table). The end result is you go through an emotional roller-coaster ride of oscillating between utter confusion and perfect wisdom every few pages or so. Enlightenment is only within reach after much suffering when you sense a pattern of the author's intermittent change of rules.

A question/answer book for options needs to be very specific and clear about what is being calculated through arithmetic (and how), what is a rule-of-thumb, and what is pure hand-waiving. Readers will unfortunately find fuzzy statements like Page 155's "We can add a small premium (20 cents) to account for the $5.00 increase in the underlying stock price." What? Where did this 20 cents come from?

Despite all my misgivings about the book, I must say that I did learn quite a bit about options - mostly because I did not give up after encountering much unnecessary hardship. I would guess that most readers would have after the first chapter or two. Hopefully you don't give up too early. As for the author, maybe it's time for a second edition. :(

I am not giving this book 5 stars because it is the next "War and Peace" or because it is an easy and fun reading experience. I am giving it 5 stars because it is very difficult to comprehend, the concepts require professional diligence and because it is unlikely that many persons will be able to master the material - exactly like the options markets. If readers are serious about entering the high-risk options trading arena it is better to get an introduction into the difficulty that they will face rather than reading the overly optimistic hype that most trading advertisers teach.

When option products were introduced in the 1970's they became an esoteric venue where there were not too many traders involved and there was much less understanding of the mechanics of the strategy. It was relatively easy to trade (even though there were much thinner markets at that time) and to generate profitable outcomes.

Trading today has become an extremely completive game with electronic information transfer, great numbers of products and strategies and world-wide participation by intelligent, intense, serious traders. Option trading has become extremely sophisticated and is really not a place for tepid speculation. This book was written with the demand of an investment of time and energy to master the concepts. It is not written for casual investors or those who are not serious about understanding complex strategies. In other words, it is not written for traders who lack the characteristics to become successful at option trading.

The book does a very good job of describing the theories and uses of option strategies. But where it is especially valuable is that it requires very close attention to the details of each trade to fully understand the factors that govern profitability. The whole spirit of the book is directed toward the focus upon and mastery of the discipline required to become profitable at a very serious, completive business. This book is an especially good challenge to test how dedicated the trader is to becoming successful.

The workbook is like having an experienced options trader as a personal mentor. Augen guides you through the process of evaluating options positions, adjusting options positions, and then taking them off. Readers who actually work their way through the scenarios presented, before looking at the answers, will more fully benefit from this book. This book takes the trader through many of the same issues presented in The Volatility Edge but adds much new material and new insights that could not be fully presented in the previous book's textbook format. Instead those issues are better shown in a question and answer format as in this workbook. I really learned a lot from this workbook and you can too!