The Option Trader Handbook provides serious traders with strategies for managing and adjusting their market positions. This Second Edition features new material on implied volatility; Delta and Theta, and how these measures can be used to make better trading decisions. The book presents the art of making trade adjustments in a logical sequence, starting with long and short stock positions; moving on to basic put and call positions; and finally discussing option spreads and combinations.
Option trading is both an art and a science. The science of option trading is very straightforward and mechanical and involves the speciﬁc steps in establishing a position, pricing, and understanding how movements in the underlying stock affect your trades. The art of trading, on the other hand, involves the use of your imagination and ingenuity. The market is your canvass and you coordinate different strategies and adjustments to create a unique painting, which is your portfolio. As mechanical as option trading seems, to be truly successful you will need to apply your own artistic style with respect to developing strategies and making trade adjustments. This book is about the art of making trade adjustments.
Making an adjustment to a stock or option position is one of the most overlooked and underutilized skills in trading. Moreover, it is one area where your personal style and imagination are valued over any other quantitative trading skill. Options give you the ﬂexibility to trade markets in any direction, or with no direction at all, and for as long or as short a time period as you want. Just as eight simple musical notes can be combined to make an inﬁnite number of symphonies and songs, calls and puts also can be combined in a number of ways, using different expiration dates and strike prices, to create an almost inﬁnite number of positions and follow-up adjustments.
Using the right trade adjustment can hedge or even boost your proﬁts, limit your losses, and create risk-free trades. Trade adjustments can also be used to repair losing positions. Whether you invest using only stocks, only options, or both, the information in this book is intended to give you the tools you need to improve your trading skills and performance. The material in this book presents the art of trade adjustments in a logical sequential order. First, we discuss the most important aspect of investing—risk and trade management. Trade adjustments are tools used to implement trade and risk management. Therefore, you cannot understand how to use the tools if you are not aware of the theory behind them.
The strategies and adjustments in the book continually build on information presented in previous chapters. Therefore, you are encouraged to read the book straight through because the strategies and adjustments become more complex and follow a natural progression. However, most traders will probably use the text as a reference handbook and go directly to the chapter or strategy they are interested in reading about. In later chapters you may ﬁnd references to earlier chapters or ﬁnd short summaries of position analysis where the relevant background to a speciﬁc strategy was presented earlier in the handbook. This book is intended to be a tool for both stock and option traders. Whatever strategy you are using, you can ﬁnd numerous trade adjustments for most situations. Making the right adjustment to your position at the right time can improve your trading skills and performance. However, all skills take time to learn and the same is true with the art of trade adjustments. Let your imagination be your guide, and this handbook will become one of the most valuable assets in your portfolio.
- Trade and Risk Management
- Tools of the Trader
- Long Stock
- Short Stock
- Calls and Puts