Trading Options for Edge (eBook)

Mark Sebastian is the CIO of Karman Line Capital and founder of Option Pit LLC, and a former member of both the Chicago Board Options Exchange and the American Stock Exchange. He is the author of the trading manual The Option Traders Hedge Fund and a frequent guest on CNBC, Fox Business News, Bloomberg, as well as a contributor to The Street’s Real Money Pro. He has been published nationally including on Yahoo Finance, and quoted in the Wall Street Journal, Forbes, Reuters, and Bloomberg. Mark has spoken for the Options Industry Council, CBOE, ISE, CME, and is a co-host on the Option Block podcast and Volatility Views podcast. He has a Bachelor’s in Science from Villanova University.

Part I: Professional Lessons Every Trader Needs to Know  1 Chapter 1: Trading in Options  3 The TOMIC  4 Build an Infrastructure  5 Build a Trading Plan  6 Select Trades Based on Articulated Criteria  7 Manage Risks  8 Learn All the Essential Elements of Trading  9 Chapter 2: Risk Management  11 The Pricing Model  12 Delta  12 Change in Underlying Price  14 Change in Strike Price  15 Time to Expiration  15 Volatility  16 Gamma  17 Price of the Underlying  19 Strike Price  20 Time to Expiration  20 Volatility  22 Vega  25 Price of the Underlying  25 Strike Price  26 Time to Expiration  27 Volatility  28 Theta  29 Price of the Underlying  29 Strike Price  30 Time to Expiration  33 Chapter 3: Market Makers, Risk, and the Individual Trader  35 How Market Makers Make Money  35 Skew  38 Term Structure  39 Market Maker Size  39 Market Maker Global Risk  41 Chapter 4: Volatility  43 Realized Volatility  43 Zone 1 Ultralow Volatility  43 Zone 2  46 Zone 3  47 Zone 4  50 Implied Volatility  51 Zone 1  52 Zone 2  52 Zone 3  53 Zone 4  54 Chapter 5: What Is Edge?  57 Edge  57 10 Day HV  58 20 Day HV  59 60 Day HV  59 Review the IV of the Product  60 IV30  61 Term Structure  62 Skew  63 Know the Zone of the Market  65 Select the Trade  67 Chapter 6: Locking in Edge  69 The Retail Trader  70 Establish the Option You Want to Execute  70 Establish the Offsetting Contract  71 The Hard and Soft Side of a Trade  71 Execute, Manage, Exit  73 Part II: Using Spreads  75 Chapter 7: A Quick Review of Spreads  77 The Call Spread  77 The Put Spread  79 The Straddle  82 Short Straddle  83 The Strangle  85 The Iron Butterfly  87 The Short Iron Butterfly  87 The Long Iron Butterfly  91 Standard Butterfly  92 The Iron Condor  94 The Short Iron Condor  94 The Calendar Spread  97 The Long Calendar  97 Short Calendar  99 Front and Back Spreads  100 Back Spreads  100 The Front Spread  101 Chapter 8: Adding Edge to Spreads  105 Credit/Debit Spreads  105 Volatility  108 Skew  110 Management  113 A Few Words on Adjusting  115 Chapter 9: Butterflies and Condors  117 The Butterfly  117 Trading a Butterfly  119 Targeting Profit in a Butterfly  124 Condors  124 Strangle  125 IV and HV  126 Skew  128 Set Up and Management  129 Chapter 10: The Front Spread  131 What Is a Front Spread?  131 Creating a Front Spread  132 IV  133 Skew  136 HV  137 The Broken Wing Butterfly  138 Trade Management  139 Aggressive Management  139 Passive Management  139 Beginning of Front Spread in TSLA  140 Target Profit  142 Broken Wing Butterfly Variation  142 Chapter 11: Calendar Spreads  145 Creating a Calendar  146 Evaluate Overall Implied Volatility  147 Evaluate Term Structure  148 Evaluate Event Risk  149 Evaluate Realized Volatility  150 Choose the Right Strikes  151 Execute the Trade  152 Manage the Trade  154 Exit  154 Part III: Gobal Risk  155 Chapter 12: How a Market Maker Trades  157 Market Making  157 The Trader  160 Step 1  161 Step 2  161 Step 3  161 Step 4  162 Chapter 13: Portfolio Greeks  165 Delta  165 Gamma  166 Theta and Vega  167 Theta  167 Vega  168 Managing a Book  172 Chapter 14: Crisis Alpha  175 Defining a Market Crisis  175 Lehman Brothers Bankruptcy  176 VIX Term Structure Determines ‘Value’ for VIX Derivatives  177 Crisis Alpha Approaches  179 Approach 1: Tactical Long VIX  179 Approach 2: Low Cost-of-Carry Options Structures  182 Exit Strategy  184 Part IV: Appendices  185 Appendix A: Important Terms  187 Historical Volatility (HV)  187 Short-Term Historical Volatility  187 Intermediate-Term Historical Volatility  188 Long-Term Historical Volatility  189 Realized Volatility (RV)  190 Forward Volatility  192 Implied Volatility (IV)  192 Calls and Puts  193 Skew  194 Term Structure  196 Volatility Index (VIX)  197 Delta  198 Gamma  199 Theta  201 Vega  202 Appendix B: Best Blogs  205 Index  207