Positional Option Trading : An Advanced Guide

Cover -- Title Page -- Copyright -- Contents -- Introduction -- Trading as a Process -- Summary -- Chapter 1 Options -- Option Pricing Models -- Option Trading Theory -- Conclusion -- Summary -- Chapter 2 The Efficient Market Hypothesis and Its Limitations -- The Efficient Market Hypothesis -- Aside: Alpha Decay -- Behavioral Finance -- High‐Level Approaches: Technical Analysis and Fundamental Analysis -- Technical Analysis -- Fundamental Analysis -- Conclusion -- Summary -- Chapter 3 Forecasting Volatility -- Model‐Driven Forecasting and Situational Forecasting -- The GARCH Family and Trading -- Implied Volatility as a Predictor -- Ensemble Predictions -- Conclusion -- Summary -- Chapter 4 The Variance Premium -- Aside: The Implied Variance Premium -- Variance Premium in Equity Indices -- The Implied Skewness Premium -- The Implied Correlation Premium -- Commodities -- Bonds -- The VIX -- Currencies -- Equities -- Reasons for the Variance Premium -- Insurance -- Jump Risk -- Trading Restrictions -- Market‐Maker Inventory Risk -- Path Dependency of Returns -- The Problem of the Peso Problem -- Conclusion -- Summary -- Chapter 5 Finding Trades with Positive Expected Value -- Aside: Crowding -- Trading Strategies -- Confidence Level Three -- Trading Strategy -- Options and Fundamental Factors -- Post‐Earnings Announcement Drift (PEAD) -- Trading Strategy -- Confidence Level Two -- Trading Equity Options over Earnings Announcements -- Trading Strategy -- The Overnight Effect -- Trading Strategy -- FOMC and Volatility -- Trading Strategy -- The Weekend Effect -- Trading Strategy -- Volatility of Volatility Risk Premia -- Trading Strategy -- Confidence Level One -- Earnings‐Induced Reversals -- Trading Strategy -- Pre‐Earnings Announcement Drift -- Trading Strategy -- Conclusion -- Summary -- Chapter 6 Volatility Positions ; Aside: Adjustment and Position "Repair" -- Straddles and Strangles -- Aside: Delta‐Hedged Positions -- Butterflies and Condors -- Aside: Broken Wing Butterflies and Condors -- Calendar Spread -- Including Implied Volatility Skew -- Strike Choice -- Choosing a Hedging Strike -- Expiration Choice -- Conclusion -- Summary -- Chapter 7 Directional Option Trading -- Subjective Option Pricing -- A Theory of Subjective Option Pricing -- Distribution of Option Returns: Summary Statistics -- Strike Choice -- Fundamental Considerations -- Conclusion -- Summary -- Chapter 8 Directional Option Strategy Selection -- Long Stock -- Long Call -- Long Call Spread -- Short Put -- Covered Calls -- Components of Covered Call Profits -- Covered Calls and Fundamentals -- Short Put Spread -- Risk Reversal -- Aside: The Risk Reversal as a Skew Trade -- Ratio Spreads -- Conclusion -- Summary -- Chapter 9 Trade Sizing -- The Kelly Criterion -- Non‐normal Discrete Outcomes -- Non‐normal Continuous Outcomes -- Uncertain Parameters -- Kelly and Drawdown Control -- The Effect of Stops -- Stop Placement -- Incorporating Stops into the Kelly Criterion -- Conclusion -- Summary -- Chapter 10 Meta Risks -- Currency Risk -- Theft and Fraud -- Example One: Baring's Bank -- Example Two: Yasumo Hamanaka, aka "Mr. Copper" -- Example Three: Bernie Madoff -- Index Restructuring -- Arbitrage Counterparty Risk -- Conclusion -- Summary -- Conclusion -- Appendix 1 Traders' Adjustments to the BSM Assumptions -- The Existence of a Single, Constant Interest Rate -- The Stock Pays No Dividends -- Absence of Taxes -- The Ability to Trade and Short the Underlying -- Nonconstant Volatility -- Conclusion -- Summary -- Appendix 2 Statistical Rules of Thumb -- Converting Range Estimates to Option Pricing Inputs -- Rule of Five -- Rule of Three -- Appendix 3 Execution -- Example -- References -- Index ; EULA