Day Trading Options: Profiting from Price Distortions in Very Brief Time Frames

By Jeff Augen

Quick Summary

Jeff Augen presents advanced strategies for day trading options, focusing on exploiting price distortions and mispricing that occur in very short time frames. The book covers the mechanics of options pricing, volatility analysis, the identification of high-probability short-term trading setups, and the use of multiple time frames and technical indicators to time entries and exits in the options market.

Detailed Summary

Options Pricing and Mispricing

Augen's approach is grounded in the observation that options are frequently mispriced in the short term due to gaps between implied and realized volatility, the dynamics of time decay (theta), changes in volatility expectations around events, and temporary supply-demand imbalances. Identifying and exploiting these mispricings in very brief time frames is the book's central methodology.

Volatility Analysis

The volatility index (VIX and its equivalents for different markets) is analyzed as a tool for predicting and trading reversals, though Augen honestly notes the difficulty of using volatility indicators as simple reversal signals. The S&P 500 example demonstrates both the potential and limitations of volatility-based timing. The distinction between historical volatility, implied volatility, and the "volatility smile" across strike prices is covered as essential knowledge for options day traders.

Technical Tools and Time Frames

The book integrates options-specific analysis with broader technical tools: candlestick patterns, trendline analysis, multiple time frame analysis (using weekly charts to avoid short-term shakeouts), volume analysis including tell-tale volume spikes, and the identification of PVP (Peak-Valley-Peak) and VPV (Valley-Peak-Valley) reversal patterns. The concept of wedge formations and symmetrical triangles as options trading setups is developed.

Strategy Categories

Specific strategies are presented for different market conditions: selling puts and calls to capture premium in range-bound markets; buying options to capture directional moves when volatility is compressed; strategies for trading around earnings announcements and other catalytic events; and the management of volatile stocks trading near strike prices. The use of weekly cycles for timing and the concept of selling more puts than calls in uptrends (and vice versa) as a systematic approach to premium harvesting are covered.

Risk Management

The "102030 test and average down" methodology, stop-loss strategies adapted for options (which behave differently from stocks near expiration), and the importance of understanding how time decay accelerates as expiration approaches are all addressed as critical risk management tools for the options day trader.

Key Takeaways

Options are frequently mispriced in the short term, creating exploitable opportunities for day traders
Understanding the dynamics of implied vs. realized volatility is essential for options day trading
Multiple time frame analysis helps avoid false signals and short-term shakeouts
Time decay (theta) creates both opportunities and risks that accelerate near expiration
Volume spikes, candlestick patterns, and reversal formations provide actionable timing signals for options trades