The Option Trader’s Hedge Fund: A Business Framework for Trading Equity and Index Options


  • Format: PDF
  • Pages: 238
  • Published Date: 2012


The Options Trader’s Hedge Fund is a unique tool that carefully explains how traders can effectively identify and manage positions like the top volatility experts do using key strategies in trend, time, and volatility. As unique as its authors, it encourages investors to embrace their individuality when developing a trading plan and discipline for trading options. A captivating and masterful read, The Options Trader’s Hedge Fund is a must-have guide that every professional trader should have in his or her library. The biggest takeaways center on methodology, risk control, and effective use of capital—the cornerstones for successful money management and trading.


The world of investments is very large. You can invest in stocks, bonds, options, real estate, CDs, commodities, or futures. Regardless of where you choose to invest your money and time, it would be very wise to have a framework with which to manage your investments. This book suggests a framework for trading options profitably; this framework has been used by an option trading hedge fund. The book is a road map for anyone wanting to trade options. We provide guidelines on how to run an option trading business successfully. We also provide you with our own experiences, learned along the way as a professional hedge fund manager (Dennis Chen) and a former market maker and trading coach (Mark Sebastian).

If you are reading this book, you already may have experienced trading options. We will not teach you how to set up a hedge fund or how to invest in hedge funds. There are other books to help you set up a hedge fund if you so desire. This book gives you a glimpse of how a particular hedge fund, Smart Income Partners, Ltd., successfully trades options for its partners. Smart Income Partners, Ltd., is an option trading hedge fund managed by Dennis Chen, a co-author of this book.

At his hedge fund, Dennis views trading options in a different light. He thinks of his business not as a hedge fund, but as an insurance company. When asked the question “What do you do for a living?” most hedge fund managers would say, “I manage a hedge fund,” or “I’m a money manager.” When someone asks Dennis what he does for a living, he answers, “I manage risk for a financial insurance company.” Let us introduce to you the concept of “The One Man Insurance Company,” or TOMIC. TOMIC is the business framework Dennis uses to operate and guide his hedge fund. TOMIC is a framework that anyone could use to manage their option portfolio. You too could run The One Man Insurance Company. In the following pages we introduce the concept, explain the framework, and show you how to manage your option trading business like Dennis does at his hedge fund. Also, you will find throughout the book key lessons they have learned during their trading careers.

Part I of the book, “The Framework,” shows you the framework details of TOMIC. In Part II of the book, “Implementing the Business,” we give you a taste of how to implement the business. This part of the book shows you specific examples of different trades that are used at the hedge fund that you could implement in your TOMIC. You will see how to trade a vertical spread, an iron condor, a butterfly, a calendar spread, and a ratio spread. Part III, “Lessons from the Trading Floor,” is a selection of blogs written by Mark Sebastian for, with an occasional guest blog written by Dennis Chen. The section covers lessons learned at the option pits on different topics. You will find words of advice on risk management, volatility, trading and execution, and the Greeks.


  • The Insurance Business
  • Trade Selection
  • Risk Management
  • Trade Execution
  • The Trading Plan
  • Trading Infrastructure
  • Learning Processes
  • Understanding Volatility
  • Most Used Strategies
  • Operating the Business: Putting Together TOMIC 1.0 from A to Z.
  • Lessons from the Trading Floor on Volatility
  • Lessons from the Trading Floor on Risk Management
  • Lessons from the Trading Floor on Trading and Execution
  • Lessons from the Trading Floor on the Other Greeks
  • The Beginning