Trading Options as a Professional: Techniques for Market Makers and Experienced Traders

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  • Edition: 1st
  • Format: Package
  • Copyright: 2008-12-12
  • Publisher: McGraw-Hill Education
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The options market allows savvy investors to assume risk in a way that can be very profitable, if the right techniques are used with the proper insight. InTrading Options as a Professional, veteran floor trader James Bittman provides both full-time and professional traders with a highly practical blueprint for maximizing profits in the global options market. ..This peerless guide helps you think like a market maker, arms you with the latest techniques for trading and managing options, and guides you in honing your proficiency at entering orders and anticipating strategy performance. Most importantly, it gives you access to one of the world's leading educators and commentators as he candidly defines the seven trading areas that are essential for successful options traders to master: .. Option price behavior, including the Greeks. Volatility. Synthetic relationships. Arbitrage strategies. Delta-neutral trading. Setting bid and ask prices. Risk management ..You will benefit from Bittman's exceptional understanding of volatility, his perceptive examples from the real world, and the dozens of graphs and tables that illustrate his strategies and techniques. Each chapter is a complete, step-by-step lesson, and, collectively, give you the best toolbox of profit-making solutions on the options trading floor. ..In addition,Trading Options as a Professionalcomes with Op-Eval Pro, a powerful software that enables you to analyze your trades before you make them by calculating implied volatility, graphing simple and complex options strategies, and saving analyses to review later. ..Don't be left guessing on the sidelines--trade with the confidence of a market maker by following the road map to higher profits inTrading Options as a Professional. .

Author Biography

James B. Bittman is a senior instructor at The Options Institute, which is the educational arm of the Chicago Board Options Exchange (CBOE).

Table of Contents

Acknowledgmentsp. xv
Introduction: Learning to Trade Options as a Professionalp. xvii
Option Market Fundamentalsp. 1
Fundamental Termsp. 1
The Market-Definition 1p. 10
The Market-Definition 2p. 11
National Best Bid and Best Offerp. 13
Margin Accounts and Related Termsp. 16
Profit/Loss Diagramsp. 19
Summaryp. 29
Operating the Op-Eval Pro Softwarep. 31
Overview of Program Featuresp. 31
Installing the Softwarep. 32
Choices of Pricing Formulasp. 34
Features of Op-Eval Prop. 35
The Single Option Calculatorp. 36
Calculating Implied Volatilityp. 39
The Spread Positions Screenp. 39
Theoretical Graph Screenp. 42
Theoretical Price Tablep. 44
The Portfolio Screenp. 45
The Distribution Screenp. 46
Summaryp. 48
The Basics of Option Price Behaviorp. 49
The Insurance Analogyp. 49
Option Pricing Formulasp. 53
Call Values and Stock Pricesp. 54
Put Values and Stock Pricesp. 56
Call Values Relative to Put Valuesp. 59
Option Values and Strike Pricep. 60
Option Values and Time to Expirationp. 62
Time Decay Is Complicatedp. 64
Time Decay and Volatilityp. 64
Option Values and Interest Ratesp. 67
Option Values and Dividendsp. 69
Option Values and Volatilityp. 69
Extreme Volatilityp. 71
Dynamic Marketsp. 71
Three-Part Forecastsp. 72
Trading Scenariosp. 72
Summaryp. 75
The Greeksp. 77
Overviewp. 77
Deltap. 78
Gammap. 80
Vegap. 83
Thetap. 85
Rhop. 87
How the Greeks Changep. 89
How Delta Changesp. 92
How Gamma Changesp. 99
How Vega Changesp. 104
How Theta Changesp. 108
How Rho Changesp. 111
Position Greeksp. 118
Summaryp. 131
Synthetic Relationshipsp. 135
Synthetic Relationshipsp. 135
Synthetic Long Stockp. 137
Synthetic Short Stockp. 139
Synthetic Long Callp. 141
Synthetic Short Callp. 144
Synthetic Long Putp. 146
Synthetic Short Putp. 148
When Stock Price [not equal] Strike Pricep. 151
The Put-Call Parity Equationp. 153
Applying the Effective Stock Price Conceptp. 155
The Role of Interest Rates and Dividendsp. 156
Summaryp. 160
Arbitrage Strategiesp. 163
Arbitrage-the Conceptp. 163
The Conversionp. 165
Pin Riskp. 167
Pricing a Conversionp. 168
Pricing a Conversion with Dividendsp. 173
Pricing Conversions by Strike Pricep. 176
The Concept of Relative Pricingp. 177
The Reverse Conversionp. 178
Pricing a Reverse Conversionp. 181
Pricing a Reverse Conversion with Dividendsp. 185
Box Spreadsp. 188
The Long Box Spreadp. 188
Pricing a Long Box Spreadp. 193
The Short Box Spreadp. 196
Pricing a Short Box Spreadp. 199
Summaryp. 203
Volatilityp. 205
Volatility Definedp. 206
Historic Volatilityp. 206
Another Look at Daily Returnsp. 213
Realized Volatilityp. 216
The Meaning of "30 Percent Volatility"p. 216
Converting Annual Volatility to Different Time Periodsp. 217
Calendar Days Versus Trading Daysp. 220
Implied Volatilityp. 222
Expected Volatilityp. 230
Using Volatilityp. 231
"Overvalued" and "Undervalued"p. 232
An Alternative Focusp. 234
Volatility Skewsp. 234
Summaryp. 238
Delta-Neutral Trading: Theory and Realityp. 241
Delta-Neutral Definedp. 242
The Theory of Delta-Neutral Tradingp. 247
Delta-Neutral Trading-Long Volatility Examplep. 248
Delta-Neutral-Trading-Short Volatility Examplep. 256
Simulated "Real" Delta-Neutral Trade 1p. 263
Simulated "Real" Delta-Neutral Trade 2p. 267
Delta-Neutral Trading-Opportunities and Risks for Speculatorsp. 272
Delta-Neutral Trading-Opportunities and Risks for Market Makersp. 275
Summaryp. 277
Setting Bid-Ask Pricesp. 279
The Theory of the Bid-Ask Spreadp. 280
The Need to Adjust Bid and Ask Pricesp. 284
The Process of Adjusting Bid and Ask Pricesp. 285
The Limit on Adjusting Bid and Ask Pricesp. 288
Estimating Option Prices as Volatility Changesp. 290
Expressing Bid and Ask Prices in Volatility Termsp. 292
Trading Exercises Introducedp. 294
Exercise 1: Buying Calls Delta-Neutralp. 296
Exercise 2: Creating a Butterfly Spread in Three Tradesp. 298
Exercise 3: Creating a Reverse Conversion in Two Tradesp. 302
Exercise 4: Creating a Long Box Spread in Two Tradesp. 306
Summaryp. 310
Managing Position Riskp. 311
Calculating Position Risksp. 312
Managing Directional Risk with Deltap. 314
Vertical Spreads versus Outright Long Optionsp. 320
Vertical Spreads-How the Risks Changep. 321
Greeks of Delta-Neutral Positionsp. 327
Neutralizing Position Greeksp. 329
Neutralizing Greeks when Interest Rates Are Positivep. 333
Establishing Risk Limitsp. 337
Summaryp. 340
Epiloguep. 343
Indexp. 345
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