by Keith Cotterill
All trades and professions include those people who excel, and stand head and shoulders above the rest. No matter what our interests or vocations may be, there are those whom we look up to, either because of their success or experience. The Futures market is no different. As we have seen, the top traders are at the very forefront of market activity.
So it makes sense that we should listen, learn and take guidance from them.
One of my favorite traders and mentors is David Caplan. As a full-time, highly successful trader, David Caplan has become a leading authority on the subject of options and options trading. He has written several books, is a frequent contributor of articles on options for Futures magazines, and is also a consultant to many top traders, banks, institutions, etc.
From the very first day options became available on Futures, David Caplan has devoted his time, money and energy to analyzing this subject. He has published his findings in a monthly newsletter, along with a twice-weekly recommendation service since 1984.
In 1990 I bought an options course, which included a seminar by David Caplan. He discussed how he used options to get an ‘edge’ in his trading and why we should do the same, if we want to have any chance of success.
The topic that struck the most powerful chord with me was OPTION VOLATILITY and how it could signal the end and the reversal of a market trend. What David Caplan had to say about option volatility made perfect sense. There was nothing complicated about it, just sheer logic: “When option volatility is at historic, or multi-year lows, the underlying market will make a significant move. Most significantly the move would generally be in the opposite direction of the existing trend.”
This fascinated me for two reasons. First, I could use this information to find markets that had the potential to make a large move. More importantly, I now had yet another cogent and logical reason to make my trading decisions.
Just like the loaded bars, option volatility relies heavily on memory of the previous results. Remember:
If it has a memory of the previous results then it must be repeatable.
If it’s repeatable then it must be predictable.
If it’s predictable it must be tradable.
And if it’s tradable then it must have the potential to make you money.
Caplans’ research and results showed this ‘memory’ to be consistent. That is, certain market activity, time and again, will reveal the same outcome. Just as a loaded down bar at the end of a down move invariably indicates the beginning of a new up move. So if you were to enter a market that exhibited historic, or multi-year, lows in option volatility, and was at a significant point in the market (top or bottom) you would have a formidable edge for making a successful trade.
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