Options: Perception and Deception. Position Disection, Risk Analysis and Defensive Trading Strategies

In Options: Perception and Deception, An experienced options educator provides traders and risk managers with a rigorous methodology for understanding and managing options risk. Cottle discusses perception of risk as the key element to success and describes how to peel off each layer of risk to isolate inappropriate risks, adjust positions as the underlying market changes, and optimize the potential of the options position. Includes two diskettes, one containing the Riskfixer software, the other containing MicroHedge Windows, an option analytic and risk-management application.

Introduction:

This book is the revision of Options: Perception and Deception which was geared towards professional Market Makers who trade their own account. Market Makers look at positions differently. Most people reading this book know something about puts and calls. To be able to trade puts and calls, one needs a full grasp of the concepts. The market takes no prisoners. It simply kills those who do not have enough knowledge and are slow to make decisions. Try to solve the following exercise in less than 60 seconds. (In live audience presentations over 90% get the answer wrong.)

• Exercise: What amount of money is the most that one can lose with the following position?
• QQQQ is trading at 37.30, The 36 call is going for 1.70 and  The 39 put is going for 1.90.

A trader buys ten of each. Obviously, this is a good position if there is a large move in either direction but what is the worst-case scenario? Owning ten calls at 1.70 and ten puts at 1.90 is 3.60 ten times making a total investment of $3600 (10 x (1.70 + 1.90) x 100 shares).

Most people figure the answer to be $3600, the limited risk amount invested—the loss is limited to the amount paid. This is incorrect. The answer is only $600 (10 x .60) x 100 shares. The proof and full explanation is in Chapter 1 just following Exhibit 1-9. After learning the market maker methods and grasping the concepts (which may be confusing at first, but it gets easier with practice), it will be possible to answer similar questions in less than 5 seconds. Such clarity can make a huge difference in one’s trading.

Contents:

• Picking Up Where the Rest Leave Off: Synthetics
• A Cause for Adjustments
• Nuts and Bolts of Options
• Strangles And Straddles
• Verticals (Bull and Bear Spreads)
• Wingspreads
• Timespreads
• Market Makers Insights
• Option Dialogue

Options: Perception and Deception. Position Disection, Risk Analysis and Defensive Trading Strategies By Charles M. Cottle pdf