Trading Options for Edge: Profit from Options and Manage Risk Like the Professional Trading Firms

Trading Options for Edge will help traders understand how to find edge, what kind of trade under what conditions will capture edge, and how to create and successfully hedge. Also The book demonstrates how to structure a portfolio of trades that makes more money with less risk. 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.

Author’s Note:

Why am I writing this book? That is the question that my wife, my co-workers, and my friends have asked me. The answer: There are many great books that explain what an option is, how they function, and what the P&L payoffs are for options both bought and sold. There are many books that then take this a step further and walk through what each type of spread is and how to build each of the spreads. These books tend to walk through the P&L payout and may delve into the basic reasons why a trader would put one of the spreads on.

Yet there are no books that I have found that adequately explain how these spreads can fit together and the optimal conditions that each of these spreads should be executed under. Essentially, there are a lot of books that can tell you what each option position is and how it makes money. But there are very few, if any, books that explain why a trade should be entered and the optimal conditions for each spread. Even more so, I am not sure there is a book that puts these spreads together so that a trader can tell when to pick a spread. My goal is to fill that void and teach traders how each position works and more importantly how to put several positions together to build a portfolio.

Now that we established why I am writing this book, let me discuss what I want you to learn by reading this book. In short, the answer is conditional trading. But what is conditional trading? Conditional trading is the art of understanding what the market looks like right now and how to trade that market. In essence, while most books are happy to teach you the ‘how to build’ portions of individual trades, there are no books (that I am aware of) that teach the why of executing a trade, when to enter that trade, and most importantly how to piece all of these trades together.

In this book I am going to show you why you would enter one trade over another. What are the exact conditions when you should trade a butterfly? What are the conditions that make a condor or straddle a great trade? When do you buy premium and when do you sell premium? If you want to buy or sell, what is the best trade for the market right now given the market conditions and the conditions in the stock, ETF, or index itself?

Then I am going to take things one step further by explaining how to piece a portfolio of trades together. If you already have on a butterfly and conditions are ripe for another butterfly, what should you do? As the market changes on a portfolio of trades, how do you add to a portfolio? Can you build a portfolio that can make money most of the time and not get completely run over in the event of a major market collapse like the ones we saw in 2008, 2011, and in August of 2015?

Once a portfolio is built, how should each of the trades and the portfolio be managed? What adjustments make sense in order to minimize losses while ensuring that good money isn’t just dumped after bad? How do you make sure that the dollars being spent to manage trades are being implemented in the best way possible?

Finally, I’ll discuss the right way to manage and hedge a portfolio for both active traders and for those looking to hedge a portfolio of trades. I’ll discuss how constant hedging and ‘crisis alpha’ are different and how to implement both. At the conclusion of the book, readers should have a clear idea of not only how the Option Pit Strategy Letter is written and managed by our pros, but how Karman Line Capital, my hedge fund, also manages risk on our trades. When you have finished this book, my hope is that you will have a clear idea not only what each trade should look like, but what a portfolio of trades should look like.

Contents:

• Trading in Options
• Risk Management
• Market Makers, Risk, and the Individual Trader
• Volatility
• What Is Edge?
• Locking in Edge
• A Quick Review of Spreads
• Adding Edge to Spreads
• Butterflies and Condors
• The Front Spread
• Calendar Spreads
• How a Market Maker Trades
• Portfolio Greeks
• Crisis Alpha
• Important Terms

Trading Options for Edge: Profit from Options and Manage Risk Like the Professional Trading Firms By Mark Sebastian pdf