Making trades in a directionless market can be a challenge, and directionless markets occur more frequently than bull and bear markets combined. Options pioneer and noted author Anthony J. Saliba provides readers with the tools and tactics to address a sideways market. Saliba focuses on strategies in the butterfly family of options―butterflies, condors, and iron butterflies―showing how to use these sophisticated tools in these markets.

Author’s Note:

The fact that listed option trading volumes are exploding is not news. As of May 1, 2008, volume is up approximately 41 percent over 2007, which was also a record year. Option volumes have grown at a rate of approximately 30 percent per year for the last four years, and have more than tripled since 2000. The forces driving option growth are much larger than recent market volatility and the need to hedge risk—after all, much of the double-digit growth took place during the low-volatility years of 2003 through early 2007. Several forces have combined to give the individual investor greater access to the options markets and to help level the playing field for the individ ual and the professional options traders:

Technology—All exchanges are now fully or partially electronic. This has opened up access to the individual options trader, as brokers now supply front-end systems that offer direct connections to every exchange and tools to help analyze, execute, and manage position risk.
Commissions—Commission rates continue to plummet as brokers leverage technology and compete for business.
Number of viable exchanges—The number of options exchanges continues to defy predictions and grow. With the recent addition of the Nasdaq Options Market (NOM), the number has now reached seven. These exchanges are in competition for the business of individual investors, and fee reductions and other incentives are the result.
Educational resources—The number of entities dedicated to options education and training continues to increase, along with the number of investors utilizing their services. The exchanges, the Options Industry Council, brokers, and other private entities offer robust programs at low cost.
Tighter bid-ask spreads—Although it is having a large negative impact on institutional options traders, the penny pilot program is very beneficial to the smaller individual investor because it has tightened spreads in many popular names.

The bigger news in the U.S.-listed options market is the growth in the electronic trading of spreads. Behind the scenes the volume of trading of complex option structures has outpaced overall growth in options trading. This book is dedicated to the art (and science) of spread trading. A number of factors have contributed to the explosion in spread trading:

Electronic spread books—Currently the Chicago Board Options Exchange (CBOE) and the International Securities Exchange (ISE) offer elec tronic spread books (the Philadelphia Stock Exchange [PHLX] is not far behind). These electronic “complex order books” allow traders the potential to electronically enter and trade multileg spread orders of various strategies—all of which are covered in this book—without the risk of being “legged” (missing one side of the spread). Spreads also can be traded in penny increments even if their underlying options cannot.
Ease of entry and exit—These same electronic spread books are accessible through the same front-end systems offered by most brokers. (If a broker doesn’t offer direct access to the spread books, it is time to switch brokers.)
Portfolio-based margining—In the past, the margining of spreads sometimes made them economically unrealistic for many investors. The availability of portfolio-based margining at many brokers has made spread margining more realistic and affordable for many investors.
Limited-risk strategies—Spreads offer investors different ways to participate in market scenarios in a limited-risk fashion. Vertical spreads, butterflies, condors, and time spreads are all limited-risk strategies that the investor can use to address different market scenarios. (After the recent subprime meltdown, limiting risk has once again become fashionable.)

Spread trading is the new frontier for the individual options trader, and this frontier is opening up rapidly. This book is dedicated to spread strategies, both of the limited-risk and unlimited-risk varieties, and to how and when to use them.