Foreword

With the rise of passive investing, the rapid proliferation of exchange-traded products and factor-based approaches to investing, it seems as if we are on the verge of explaining away almost all of what used to be known as alpha. In such circumstances, active investors can be forgiven for wondering if they are playing an unwinnable game. The traditional investment universe is being eroded, commoditized and shrink-wrapped, with algorithms taking over and humans asked to step aside.

Enter options, the next frontier in investing. Here the playing field is evolving quickly and the dynamics are poorly understood by many, leaving a wide variety of significant opportunities for those who are willing to invest the time and energy to understand the nuances of options.

Mark Sebastian is just the person to help explain why options are the next frontier, how to think about them in the context of the broader investment landscape and point to specific methods to capitalize on the opportunity space.

I have known Mark for almost a decade and during this time he has been a leading thinker, writer and educator in the options world. He and I are both naturally drawn to the volatility aspect of the options space and I have always been impressed by Mark’s grasp of the big picture as well as some of the minute details that are critical to understanding the VIX and volatility.

As someone who has spent every day for the past dozen or so years thinking about the VIX and volatility, I like to size up options traders by how they think about volatility and right from our first conversation, I knew Mark had a deep understanding of the intricacies of the volatility space. In fact, I was pleased to see that in Trading Options for Edge, Mark takes the time to identify four different types of trading environments corresponding to four different levels of the VIX. Better yet, he explains why each volatility zone presents different challenges and opportunities for the options trader. This volatility zone approach is similar to some of my own work and it is refreshing to see it appear here in Mark’s own analytical framework.

Mark runs one options-oriented hedge fund and will soon launch his second options hedge fund. In addition, Mark has provided consulting expertise on options and volatility to a number of hedge funds and in his spare time acts as the go-to source on all things VIX for luminaries such as Jim Cramer.

In his first book, The Option Trader’s Hedge Fund, Mark focused on various options strategies and the main risk management and execution issues associated with those strategies. This time around, Mark takes a novel approach I believe will appeal to all readers. Instead of using options strategies as the starting point and providing guidance for which types of conditions are more/less favorable for particular strategies, Mark uses market conditions and options analytics as a starting point. Most options traders have favorite strategies that they use over and over again in a wide variety of market conditions – and not surprisingly, see varying results. Trading Options for Edge is all about understanding how the edge is different in different market environments, with a particular emphasis on volatility conditions, skew and term structure. In other words, this book teaches readers what to look for in the options market and how to translate that analysis of the market into trading what the market gives you. In short, this is not reasoning from options to preferred setups, but looking at setups and market conditions first, then utilizing the options trades that provide the best edge for those setups.

This distinction is not just an academic one, but should be of critical importance going forward. For the past nine years, we have been in a period of declining volatility and are currently experiencing record low volatility. This trend is about to change and as volatility conditions change, so will the edges for everyone’s favorite options strategies. Strategies that have been strong performers as of late are sure to struggle while a new set of options strategies will rise to the top.

Frontiers, by their nature, are difficult to comprehend, challenging to navigate and often fraught with danger. It is precisely because so many struggle on the frontier that there is so much opportunity for those who can master a new and poorly mapped terrain.

I am not entirely sure that Mark is the ideal guide to help you find your way through the Alaskan tundra, but when it comes to options, understanding the intricacies of volatility and knowing which market conditions favor certain setups and options strategies, Mark’s is the guide you want to have at your side. With Trading Options for Edge, Mark turns the tables on traditional options analysis with a top-down approach that is ideally suited to changing market conditions and navigating to the best options trades for each and every market environment.

Embrace the frontier and enjoy the journey!

Bill Luby

Chief Investment Officer, Luby Asset Management

Publisher, VIX and More (VIXandMore.blogspot.com)

October 2017