Trading Book Reviews

Book Review: Trading Realities by Jeff Augen

Laying out some option strategies that could be used along with or in place of holding stocks

[easyazon-link asin=”0137070098″][/easyazon-link]I recently finished reading [easyazon-link asin=”0137070098″]Trading Realities[/easyazon-link] by Jeff Augen. The book was made available to be for free (via Amazon) and I opted to give it a look because it sounded like it was written for new traders. Obviously, the area of new trader education is one I have a lot of interest in. That being the case, I thought it made a lot of sense to check this book out to see if it was worth recommending.

Unfortunately, this isn’t one I’m putting on my recommended list.

I’m not entirely sure what the point of this book was. I think it was to present option trading as a better path for trading the stock market than actually trading the stocks themselves, but I can’t be positive. The author does do a pretty good job of laying out some option strategies that could be used along with or in place of holding stocks, and I definitely agree that for many people they present a better path (I for one have been trading options rather than stocks for quite a few years). That’s just one chapter out of seven, though.

Unclear focus aside, I have a few major issues with the book.

First, there are things he says in the book which are flat out incorrect. One of them is very early on and very obvious for anyone familiar with the currency market. He suggests that during the major dollar weakness a few years ago the Yen reached a value of $1.15. The fact of the matter is that the Yen has never been worth more than about $0.0125 – that one and a quarter cents. This isn’t a horrible error, and doesn’t alter the context of what he’s saying at that point in the text, but it does trigger a credibility warning flags.

A much bigger error, especially coming from someone claiming expertise in options, comes when he talks about price change distributions – an important element in volatility measurement and option pricing. He makes the statement “These values fit a bell-shaped curve where the peak represents a small number of unusually large price changes.” This is totally incorrect. The peak of a bell curve represents a very high frequency of small price changes. I thought maybe he’d just misspoke, but in the same paragraph the author goes on to talk about how the large price spike in Amazon was the peak of the bell curve of that stock’s price change distribution. Anyone who’s ever studied basic statistics would know that to be completely backwards. This definitely challenges his credibility.

Oh, and he talks about price changes in terms of them fitting a standard normal distribution, which has been well documented as being incorrect. Real price change distributions in the market have fatter “tails”, which mean higher probabilities of large price moves than a normal distribution would suggest.

My second issue with the book was the extreme cynicism that dominated most of the first half of the text. The author basically goes off on a rant about things like the impact of high frequency trading, how investors who think they can do a better job picking stocks are fooling themselves, and how the government is lying to us through the statistics it publishes. There are talking points in there, to be sure, but the one example of erroneous stats he show is hardly proof of anything.

Another issue I have is the amount of ex post facto market analysis the author does in the text. At points it’s little more than a history lesson. Sure, there’s always value in going back and reviewing things, but isolated examples of how one should have interpreted developments doesn’t really give the reader a lot they can use moving forward – especially since, according to the author, the individual cannot hope to beat the institutions anyway.

But wait! In the latter half of the book the author lays out directionally based options strategies which imply the trader/investor is looking for the market to move a certain way and can get it right. He also talks late in the book about how modern technology allows individuals to identify inefficiencies in the market, even though he spent pages earlier talking about how the market is efficient and how individuals cannot hope to compete on the technology side with the institutions. In other words, there’s a fair bit of contradiction.

The author has other books on option trading which might be better choices. Needless to say, I’d skip this one.

Make sure to check out all my trading book reviews.

By John

Author of The Essentials of Trading

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