book review
Strangles and Straddles
Commodity Options:
Trading and Hedging Volatility in the World’s Most Lucrative Market
by Carley Garner and Paul Brittain. FT Press. 2009. 288 pages. $39.99.
Carley Garner and Paul Brittain, coauthors of Commodity Options: Trading and Hedging Volatility in the World’s Most Lucrative Market, have so much confidence in their options trading philosophy that they publish their trades on the Internet and distribute them by e-mail before they execute them in the marketplace. That confidence is palpable throughout Commodity Options, as they describe endless esoteric convolutions of the four basic instruments in trading—long, short, call, and put—and show the risk and reward possibilities of each combination, from strangles and straddles to iron butterflies and iron condors.
Garner and Brittain coax readers gently through such complex subjects as leverage, and they particularly shine in the chapter on synthetic swing trading. That method uses a combination of long and short options, including bull call spreads with a naked leg, bear put spreads with a naked leg, ratio call spreads, ratio put spreads, and synthetic options and futures.
Their tutorial on the “double-edged sword” of volatility is also solid; it emphasizes the extent to which volatility can work for or against traders, and clearly delineates how the outcome of a trade can be at the mercy of high volatility in the rate of change in the price of a futures contract, security, or any other instrument underlying an option.
There are guided tours of key subjects such as break-even and reverse break-even points, in which the authors offer a patient, structured breakdown of the break-even as the point at which a particular long option spread executed as a debit will monetarily break even at expiration, and of the reverse break-even as the point at which a short option or option spread executed as a credit monetarily breaks even at expiration (after this, the trade becomes a loser at expiration).
There’s a neat debunking of the argument that simultaneously buying a call and a put will make money for the trader whether the market goes up or down. Garner and Brittain point out that while this may be true in theory, in practice the approach requires a tremendous and highly unlikely move in the market to return anything tangible at all.
The distinction between trading options on futures and trading options on stocks is fundamental throughout the book. The important options differences between futures and stocks—underlying assets, market mechanics, tax treatment of gains and losses, regulating bodies, and trading tools—are iterated carefully and explicitly. The focus is resolutely practical: this is indubitably a hands-on self-help manual for traders.
But at the same time, it’s no unbiased textbook. The content is highly opinionated. Readers are ordered to trade when the markets are at all-time highs or lows, forbidden to rely on economic and agricultural reports, and warned sternly against buying options outright at a cost of more than $500.
The authors are sharply critical of “the Greeks,” a group of mathematical equations that stock options traders “swear by.” They assert that the Greeks are unreliable “in the arena of options on futures” and that “the primary shortcoming to the theory of the Greeks is a lack of liquidity in many of the commodity options.” They make a convincing argument, while acknowledging, begrudgingly, that the Greeks have some value in daily analysis and that they themselves use delta values regularly.
As for the ubiquitous option model developed by Fischer Black and Myron Scholes—it’s flawed. Garner and Brittain allege that the Black–Scholes model can’t determine the fair value of stock and commodity options with an acceptable level of accuracy, in large part because of its dependence on a single price and its failure to account for the bid–ask spread. Their arguments are compelling and, they insist, are “based on firsthand observation and interpretation.”
There’s a bit of pop psychology throughout all of this—the text is liberally sprinkled with feel-good clichés, hokey slogans, and pop-cultural quotations. The authors implore readers to “use your head not your ego,” when deciding how much risk to assume. They chant the mantra “Buy it when you hate it and sell it when you love it!” They beseech us to know and control our own emotions. They quote the character Marvin, from the 1987 Oliver Stone film Wall Street: “We are all just one trade away from humility.” And they earnestly assure traders that their “biggest obstacle to making money in futures trading is psychological.”
But their sloganeering doesn’t devalue the integrity of Garner and Brittain’s work in options. Hidden behind the warm and fuzzy palaver is fierce intelligence and an aggressive stance—Commodity Options is a real wolf in sheep’s clothing.
Phyllis Feinberg is a journalist working in New York City.
