Despite being an advanced text, Natenberg is a fierce advocate for risk management. He graphically illustrates the "unlimited loss" profile of a naked short call in a short squeeze scenario. He insists that any naked option should be treated as a volatility bet, not a directional bet, and must be monitored for tail risk.
Combine different strikes and different expirations. You sell a near-term, high-theta option against a long-term, low-theta option. Natenberg notes this exploits the term structure of volatility. If the forward volatility curve is steep (near-term IV high), you sell the front and buy the back.
Take a live ticker (e.g., SPY, TSLA). Calculate the 20-day Historical Volatility. Compare it to the Implied Volatility of the At-The-Money Straddle. Is IV > HV by 5%? 10%?
In the pantheon of financial literature, there are introductory guides and there are career-defining bibles. For the professional options trader, Sheldon Natenberg’s Option Volatility & Pricing: Advanced Trading Strategies and Techniques sits firmly in the latter category. Despite being an advanced text, Natenberg is a
Natenberg introduces the concept that a Delta-neutral position is not static. As the underlying moves, Delta changes (Gamma). A professional trader "scalps" these moves.
Natenberg emphasizes that . A trader cannot simply "set it and forget it." He introduces the concept of "Gamma Scalping profit targets" to decide when to neutralize Delta.
The "edge" in Natenberg’s world comes from trading the spread between HV and IV. If IV is 20% but HV is consistently 15%, the options are expensive. If IV is 20% and HV spikes to 30%, the options are cheap. Combine different strikes and different expirations
He notes that volatility trading is uniquely dangerous because losses happen slowly (Theta decay) and then catastrophically (Vega spikes). He provides a checklist for the disciplined trader:
Natenberg dedicates significant space to the fact that Black-Scholes assumes a normal distribution (Bell curve), but markets have "fat tails."
This is . When this equation is out of balance by more than the transaction costs, an arbitrage exists. If the forward volatility curve is steep (near-term
Here is the advanced playbook, stripped of the academic jargon, based on the master’s framework.
Next time you look at an option chain, don't ask, "Will it go up?" Ask Natenberg's question: "Is the implied volatility cheap or expensive relative to the statistical truth?"
Sheldon Natenberg's Option Volatility and Pricing: Advanced Trading Strategies and Techniques