Trading Options As a Business

Updated: Mar 10th, 2017 | |

Recently I finished reading a book on options that doesn&8217;t explain the basics of calls and puts.  The Greeks are on almost every page, but never defined, and it&8217;s assumed that the reader already knows options strategies and acronyms (e.g., butterflies, condors, ratio spreads, ATM, OTM).

Clearly the &8220;The Option Trader&8217;s Hedge Fund&8221; is not for beginners. It targets serious traders that know the basics and want a full picture of what&8217;s required to professionally trade options.   Using the apt analogy of an insurance business Dennis Chen and Mark Sebastian construct the fundamentals of a well designed options trading business, including capital requirements, risk management,  infrastructure needs, and recommended processes.

Within that framework they layer on a rich compendium of practical option advice. Some topics are strategy independent, for example:

  • How the market interacts with market makers to establish option pricing
  • Real vs theoretical pricing of OTM options
  • &8220;Card Game Risk&8221; pricing
  • Stages of skew
  • VIX Index nuances
  • Cash as a position

Other sections cover common strategies like vertical spreads, condors, butterflies, and calendars detailing the key parameters the authors evaluate and track including:

  • Volatility requirements and expectations
  • Skew parameters
  • Recommended profit targets
  • Margin requirements
  • Trade time frames
  • Typical trade duration
  • Risk management /  insurance
  • Adjustment strategies
  • Exit points

The trade selections that Dennis and Mark discuss are classic volatility trades—evaluating historical volatility, skew, and term structure in search of mispriced options.   Target profit is 5% to 10% on many of the setups and the suggested initiations are 30 to 60 days before expiration.  You won&8217;t read about earnings plays or expiration week strategies in this book (check out Mark&8217;s blog for that).

The Option Trader&8217;s Hedge Fund bridges the gap between starter books and reference style books.  It will challenge you, but I&8217;d be surprised if you don&8217;t come away with some valuable insights.

Friday, March 10th, 2017 |