Description
Book SynopsisStrategies, tools, and solutions for minimizing risk and volatility in option trading
An intermediate level trading book, The Option Trader Handbook, Second Edition 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.
- Covers different types of underlying positions and discusses all the possible adjustments that can be made to that position
- Offers important insights into more complex option spreads and combinations
- A timely book for today''s volatile markets
Intended for both stock and option traders, this book wil
Table of Contents
Preface to the First Edition xiii
Preface to the Second Edition xvii
Chapter 1 Trade and Risk Management 1
Introduction 1
The Philosophy of Risk 2
Truth About Reward 5
Risk Management 6
Risk 6
Reward 9
Breakeven Points 11
Trade Management 11
Trading Theme 11
The Theme of Your Portfolio 14
Diversification and Flexibility 15
Trading as a Business 16
Start-Up Phase 16
Growth Phase 19
Mature Phase 20
Just Business, Nothing Personal 21
SCORE—The Formula for Trading Success 21
Select the Investment 22
Choose the Best Strategy 23
Open the Trade with a Plan 24
Remember Your Plan and Stick to It 26
Exit Your Trade 26
Chapter 2 Tools of the Trader 29
Introduction 29
Option Value 30
Option Pricing 31
Stock Price 31
Strike Price 32
Time to Expiration 32
Volatility 33
Dividends 33
Interest Rates 33
Option Greeks and Risk Management 34
Time Decay 34
Trading Lessons Learned from Time Decay (Theta) 41
Delta/Gamma 43
Deep-in-the-Money Options 46
Implied Volatility 49
Early Assignment 63
Synthetic Positions 65
Synthetic Stock 66
Long Stock 66
Short Stock 67
Synthetic Call 68
Synthetic Put 70
Basic Strategies 71
Long Call 71
Short Call 72
Long Put 73
Short Put 74
Basic Spreads and Combinations 75
Bull Call Spread 75
Bull Put Spread 76
Bear Call Spread 77
Bear Put Spread 78
Long Straddle 78
Long Strangle 79
Short Straddle 80
Short Strangle 81
Advanced Spreads 82
Call Ratio Spread 82
Put Ratio Spread 83
Call Ratio Backspread 84
Put Ratio Backspread 85
Long Butterflies 86
Short Butterflies 87
Long Calendar Spreads 88
Short Calendar Spreads 89
The Greeks and Spread Trades 90
Delta/Gamma 91
Vega 92
Other Greeks and Spreads 93
Valuable Derivative Traders Program 93
Step 1: VEGA and Implied Volatility (IV) 94
Step 2: Delta and Strike Selection 96
Step 3: Theta and How Much Time to Expiration 97
Putting the Program to Work 99
Introduction to Trade Adjustments 100
Chapter 3 Long Stock 105
Introduction 105
Protective Put 106
Stock Moves Higher 109
Stock Moves Lower 111
Bear Put Spread 114
Rolling from a Protective Put into a Bear Put Spread 116
Rolling from a Bear Put Spread into a Protective Put 118
Call Replacement 120
Stock Moves Higher 121
Stock Moves Lower 122
Call Replacement versus Protective Put 123
Sell Covered Calls 123
Stock Moves Higher 125
Strike Selection 127
In the Money Calls 128
Time to Expiration 131
Scaling-Out Strategy 132
Collars 134
Opening Position—Regular Collar 134
Stock Moves Higher—Profit Collar 137
Ratio Write 139
Opening Position 140
Stock Moves Higher—Regular Ratio Write 143
Stock Moves Higher—Variable Strike Ratio Write 149
Stock Moves Lower—Ratio Write/Variable Strike Ratio Write 153
Short Straddle/Short Strangle 156
Opening Position—Short Straddle 156
Opening Position—Short Strangle 160
Stock Moves Higher—Short Straddle 163
Stock Moves Higher—Short Strangle 168
Stock Moves Lower—Short Straddle/Stock Repair 172
Stock Moves Lower—Short Strangle 176
Call Ratio Spread 179
Opening Position 182
Stock Moves Higher 186
Stock Moves Lower—Stock Repair Strategy 191
Call Calendar Spread 193
Opening Position 195
Stock Moves Higher 196
Chapter 4 Short Stock 201
Introduction 201
Protective Call—Insurance 203
Opening Position—Protective Call 203
Opening Position—Protective Call Spread 208
Short Stock + Protective Call = Long Put 210
Stock Moves Lower—Protective Call 212
Stock Moves Lower—Protective Call Spread 215
Rolling between Protective Calls and Protective Call Spreads 219
Stock Moves Higher 221
Put Replacement 223
Stock Moves Lower 224
Stock Moves Higher 226
Put Replacement versus Protective Call 227
Covered Puts 228
Stock Moves Lower 229
Short Collars 234
Opening Position—Regular Collar 235
Stock Moves Lower—Profit Collar 237
Put Ratio Write 239
Opening Position 240
Stock Moves Lower—Regular Ratio Write 243
Stock Moves Lower—Variable Strike Ratio Write 248
Put Ratio Spread 250
Opening Position 250
Stock Moves Lower 253
Stock Moves Higher—Short Repair Strategy 256
Chapter 5 Calls and Puts 259
Introduction 259
Long Call 260
Protective Put—Stock Moves Higher 260
Protective Put—Stock Moves Lower 262
Call Replacement 264
Rolling into a Bull Call Spread—Stock Moves Higher 267
Rolling into a Bull Call Spread—Stock Moves Lower/Call Repair Strategy 269
Rolling into a Bear Call Spread 271
Short Stock 272
Rolling into a Synthetic Straddle 274
Rolling into a Calendar Spread 276
Rolling into a Ratio Spread 278
Stock Moves Lower—Call Repair Strategy 281
Short Call 285
Long Put 288
Protective Call 288
Underlying Stock Moves Lower 288
Underlying Stock Moves Higher 290
Put Replacement Therapy 292
Rolling into a Bear Put Spread 294
Underlying Stock Moves Lower 294
Underlying Stock Moves Higher—Put Repair Strategy 295
Rolling into a Bull Put Spread 297
Long Stock/Synthetic Straddle 298
Put Calendar Spread 302
Put Ratio Spread 305
Underlying Stock Moves Lower 305
Underlying Stock Moves Higher—Put Repair Strategy 308
Short Put 311
Chapter 6 Spreads 317
Introduction 317
Bull Call Spreads/Bear Put Spreads 317
Protective Puts/Protective Calls 318
Bull Call Spread—Protective Put 318
Bull Call Spread—Protective Put Spread 320
Bear Put Spread—Protective Call 321
Bear Put Spread—Protective Call Spread 322
Convert to Ratio Spreads 323
Bull Call Spread—Stock Moves Higher 323
Bull Call Spread—Stock Moves Lower/Repair Strategy 326
Bear Put Spread—Stock Moves Lower 330
Bear Put Spread—Stock Moves Higher/Repair Strategy 332
Convert to Butterflies 336
Bull Call Spread 337
Bear Put Spread 338
Bear Call Spreads/Bull Put Spreads 340
Calendar Spreads 340
Call Calendar Spread 341
Stock Moves Higher—Rolling into a Bull Call Spread 341
Stock Moves Higher—Rolling into a Diagonal Ratio Spread 342
Stock Moves Lower—Rolling into a Lower Strike Bull Call Spread 343
Stock Moves Lower—Convert to a Calendar Strangle 344
Put Calendar Spread 345
Stock Moves Lower—Rolling into a Bear Put Spread 345
Stock Moves Lower—Rolling into a Diagonal Ratio Spread 345
Stock Moves Higher—Rolling into a Higher Strike Bear Put Spread 347
Stock Moves Higher—Rolling into a Calendar Strangle 348
Butterfly Spreads 348
Long Butterfly to Long Condor 348
Chapter 7 Combinations 353
Introduction 353
Long Straddle 353
Straps/Strips 354
Modified Straps/Strips 357
Calendar Straddle 359
Rolling a Long Straddle into an Iron Butterfly 361
Diagonal Iron Butterfly 363
Partial Iron Butterfly 363
Long Call/Long Put Adjustments 365
Long Strangle 365
Diagonal Iron Butterfly 365
Calendar Strangle 367
Long Call/Long Put Adjustments 367
Short Straddle/Short Strangle 368
Short Straddle 368
Rolling Short Straddle into Iron Butterfly 371
Short Strangle 373
Index 375
