Option Strategy Hedging & Risk Management: An In-Depth Article Introducing an Interactive Analytical Framework for Hedging Option Strategy Risk

by Brian Johnson

Brian Johnson, an investment professional with over 30 years of experience, is the author of three pioneering books on 1) Option Strategy Risk / Return Ratios, 2) Exploiting Earnings Volatility, and 3) Option Income Strategy Trade Filters. His new in-depth (80+ page) article, Option Strategy Hedging and Risk Management, presents a comprehensive analytical framework and accompanying spreadsheet tools for managing and hedging option strategy risk. Drawing on his extensive background in option-pricing and on decades of experience in investment management and trading, Brian Johnson developed these practical techniques to hedge the unique and often overlooked risks associated with trading option strategies. These revolutionary new tools can be applied to any option strategy, in any market environment. Option Strategy Hedging and Risk Management is written in a clear, easy-to-understand fashion and explains how to apply market-specific hedging techniques, using several different hedging vehicles. Created especially for readers who have some familiarity with options, this practical guide begins with a review of position sizing, including a detailed analysis of the implicit assumptions and embedded risks that could have disastrous consequences, particularly for option traders. Chapter 2 includes a comprehensive description and analysis of the actual option strategy, position model, and trade rules that are used to create real-world option strategy hedges in the subsequent chapters. This is followed by a thorough explanation and a concrete example of how to use futures to hedge option strategy exit risk. Surprisingly, futures are not well understood in the option community and very few traders employ this simple, effective, and virtually free hedging tool. The next two chapters present a common analytical and hedging framework that is used to identify the most cost-effective hedging solutions for an actual option strategy in a real-world market environment. The process used to identify the lowest-cost hedging solution using actual VIX call options is explained in Chapter 4, followed by the same hedging analysis using put options on the underlying security in Chapter 5. All hedging examples in the article use real-time market prices and actual analytical results. Proprietary research is included in the article to provide validation for the analytical framework. The article was written to be accessible to a wide audience, so very few mathematical formulas are provided in the text. However, several important formulas are included to facilitate the understanding of important concepts, and to provide further research opportunities for inquisitive traders. The article also includes thirty separate graphs and tables to illustrate how the tools can be used in practice. Perhaps most important, Option Strategy Hedging and Risk Management includes a download link to the accompanying Excel spreadsheet with macros designed to perform all of the position sizing and hedging calculations in the article. Chapters 1, 3, 4, and 5 all have their own dedicated tabs in the spreadsheet. The data from the article is included in the spreadsheet, which allows the reader to reproduce all of the examples from the article. All of the spreadsheet functions are automated through the use of push-button macros, making spreadsheet operation as simple as possible. Finally, Chapter 6 examines practical considerations and prospective applications of these innovative new tools.

130 pages, Kindle Edition

Published March 20, 2017

About the author

Librarian Note: There is more than one author in the Goodreads database with this name.

My word where to begin? I've had time on my hands over recent years, following early retirement, that I believe has been put to good use. My wife and I enjoy holidays, theatre and dining out, together I hasten to add; which I guess would keep most people content. Primarily though, I think I have been lucky to spend more time with my grandchildren than would otherwise have been possible.
I've been able to do some not very good watercolour pantings and some cooking which has turned out to be surprisingly edible.
As far as my writing is concerned; it was originally no more than a case of give it a try and see how it goes. The first chapter of my debut Captain Shoelace story was so well received by friends and family that I was encouraged to see it through to the end.
It seems that the book is appreciated by a wider audience than I anticipated. So much so in fact, another Shoelace story is in the pipeline. Whoever would have believed it!

Reviews

[Bill T. · Rating 2 out of 5]

This book was rather frustrating. The part of the book that was new to me was his chapter on using VIX calls to hedge against catastrophic drops in prices (his discussion of using deeply out-of-the-money puts to similar ends is well knows as "portfolio insurance" and has been around for decades). Annoyingly, however, he never comes out and says that's what he's describing! He jumps from a entry-level description of what the VIX is to "how to fill out my magic spreadsheet". A page or two to describe what he's doing and the theoretical basis, whether in formulae or with vague generalities (or, ideally, both), would have been really helpful.

That, and he never mentions the obvious strategy for avoiding a catastrophic loss: Don't risk more than you can afford to lose.