The Options Edge: Winning the Volatility Game with Options on Futures

The major question that is answered in the book is can the option trading be profitable in the long run? Is it possible make money as an option buyer? The book is the distillation of the results of the author's major empirical investigation into option pricing carried out over a 2-year period from 1996 to 1998. Many, many theoretical works have been written (by mathematicians anxious to display an encyclopedic knowledge of the Greek alphabet) on the topic of option pricing. Virtually all theoretical works on options are needlessly complex and of limited practical use in the real world of options valuation and options trading. Much of this complexity stems from the option trading community's uncritical allegiance to the million dollar formula. This book, in the opposite, is mostly empirical. The author has directed the reader's attention to egregious instances of misleading information in the literature, especially where this information has been widely disseminated and even accepted as gospel. For all that, The Options Edge is concerned more with pragmatic issues than with theoretical arguments. The author would rather search for something of practical value than come up with another set of abstruse mathematical equations of limited applicability in the real world. There is but one Greek letter (unavoidable) in this entire book. Whereas much of what the author says 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. The Options Edge will most likely appeal to readers with some practical experience in the trading of options. It should not be, however, your first book on options or commodity futures. 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. Enough said, this analyzes popular misconceptions and irrational beliefs, when it comes to options on commodity futures. If you are interested in similar analysis to the market in general, I would recommend The Only Three Questions That Count by Ken Fisher.

This book contains some very useful information for people who write options and wonder if their profitability is sustainable over the long run (hence the title "options edge"). Although Gallacher states that the edge between writers and buyers is zero (based on his empirical evidence); he illustrates that writers still can make consistent positive return on their trading, as long as they sell implied volatility which exceeds historic volatility and as long as they cover their short positions in options with futures at strike. Unfortunately, Gallacher doesn't compare LEAPS to futures as a way to cover short positions in options. An easy and enjoyable read!

The research work is better than most available and the writing very good (See his other book as well). However if somebody can answer the following: Isn't there a risk of blowing up the strategy with a string of limit days? They may be rare, but their effects are extreme (see Nassim Taleb's site and/or book). At one point limit days are mentioned; they are handled by using the price at the limit. This assumes that one can trade futures at the limit price, which is not a guaranteed thing. Otherwise, the new and refreshing look at option pricing is excellent. Clearly accuracy is more important than precision in markets with bid/ask spreads and Mr. Gallacher is able to cut to the core of the issue. Lots to consider, but that one problem remains.

This book is a very enjoyable read. The author uses real world data from options on futures to demonstrate where the edge really lies, allowing the trader to improve his chances. It is written in a very practical manner, showing the many weaknesses of highly theoretical option pricing models and why they rely on needless mathematics. The reader will see how options work in the real world. This book has been written by a real trader not a theorist. As a options trader myself, I would highly recommend this book.

AS a trader and market observer for over thirty years I found The Options Edge to be one of the best three books I have read on market behaviour. Since I am Mensa-challenged I allowed myself the liberty of skipping some of the advanced math. The key value of this book is two-fold--- 1)It correctly debunks the myth that "rocket scientists" know anything about the market. 2)There are many "nuggets" scattered throuhgout the book that have a critical value for anyone hoping to succeed as winning investor. Unfortunately one has to be "burned" many times to appreciate the contained wisdom. I am not sure the neophyte will grasp this message. However,it would not be wasted on all the wunderkind fund managers out there. FIVE STARS G.McAllister M.D.