How to Price and Trade Options

Introduction xi CHAPTER 1 Why Trade Options? 1 Strategic without Being Directional 2 A Word about Leverage 2 Options Are a Decaying Asset 5 Insurer or Insured? 6 Probability of Making Money 6 Market Efficiency 7 Tired, Worn?]Out Metaphors 9 CHAPTER 2 What to Look for in a Broker 11 Brokerages versus Banks 11 Depth of a Broker's Pockets 12 Trading Risk Management 13 Learning from Recent Events 14 Account Types 14 Commissions 16 Interest Rates 18 Stock Borrow and Loan 19 Trading Platforms 22 Conclusion 24 CHAPTER 3 Building the Foundation 25 Option Pricing Models 26 Option Pricing Model Inputs 27 Historical Data as Input into the Implied Volatility of an Underlying 29 Implied Volatility as a Predictor of Stock Movement and Probabilities 30 The Distribution Curve 31 Breakout Stocks 45 Actual versus Historical Distribution Curves 50 CHAPTER 4 Trade Probabilities: What to Look For 55 The Results 59 How to Calculate Option Probabilities 63 CHAPTER 5 Choosing Your Trades 67 Choosing Your Underlying 67 Making an Assumption 78 CHAPTER 6 Choosing a Strategy 83 Defined Risk Trades 85 Credit Spreads 85 Debit Spreads 88 Butterfly 89 Iron Condor 91 Calendar Spreads 92 Undefined Risk Trades 96 The Straddle 97 The Strangle 97 Short Naked Puts 98 Ratio Spreads and Back Spreads 100 What Time to Expiration Should My Trades Have? 103 Trading Earnings Announcements 105 CHAPTER 7 Exiting Trades 123 The Variables 123 The Kelly Criterion 125 Morning Routine 130 To Log Your Trades or Not to Log Your Trades 135 CHAPTER 8 Executing Your Trades 141 Order Types 142 CHAPTER 9 Portfolio Management 153 Two Types of Risk 154 The Goal: Diversification--Minimizing Unique Risk 155 The Methods: Correlation and Number of Positions 156 Identifying and Mitigating Systematic Risk 163 Trade Sizing 180 Early Exercise 183 Conclusion 189 About the Website 191 About the Author 193 Index 195