A leading expert unveils his unique methodology for options trading Options provide a high leverage approach to trading that can significantly limit the overall risk of a trade or provide additional income. Yet, many people fail to capitalize on this potentially lucrative opportunity because they mistakenly believe that options are risky. Now options expert Andrew Keene helps aspiring investors to enter this sector by explaining the principles of the options market and showing readers how to utilize calls and puts successfully. * Leading options expert Andrew Keene demystifies the basics of options trading * Debunks the myth that call purchases are synonymous with being bullish and that put purchases are bearish * Lays out in detail two distinct proprietary trading plans readers can follow * Explains how to trade using market maker techniques and tricks from the trading floor to help with his probabilities in options trading Andrew Keene is best known for reading unusual options activity and seeing what others don't. Now he shares what he knows in a book that opens the opportunities of options trading to any investor.
Preface xiii Acknowledgments xix Chapter 1 Introduction 1 I Love to Trade 1 From Young Clerk to Respected Market Maker 2 Trading Career at the CBOE 3 The AAPL King 4 From Trading Pit Hotshot to Retail Trader 5 The Live Trading Room: From Options 101 to Complex Strategies 6 Questions 7 Chapter 2 The Life of a Professional Trader 9 Perks of Being a Trader 10 Not Quite as Glamorous as Everyone Thinks 11 The Rollercoaster of Trading 11 This Is Not Monopoly Money 12 It Takes Money to Make Money 12 The Setup 13 Trading Expenses and Opportunity Cost 14 Sticking to a Plan 15 Questions 15 Chapter 3 Trading for a Living: Hobby or Career? 17 Trading for Amusement 17 Enjoying Your Profits 18 Moving from Amateur to Professional 19 Moving from Simulated Account to Real Trading 19 Moving from Simple to Complex Strategies 20 Investing in Your Options Education 20 Go Slow, Go Pro 21 Defining Goals 22 Questions 22 Chapter 4 Who the Players Are: Market Makers 25 DPMs 26 The Death of Market Makers 26 Retail Traders 27 Hedge Funds 28 Institutional Traders 29 Options Exchanges 30 Questions 31 Chapter 5 Options Brokers and Platforms: The Right Options Broker for You 33 Full-Service Brokers and Options Trading 34 Discount Brokerage Firms 35 Researching Discount Brokers Firms 36 Options Brokerage Firms Fees 37 Use of Margin 37 Automatic Liquidation 38 Questions 39 Chapter 6 Technical Trading: Security Timing Tactics 41 Support and Resistance Levels 43 What Is a Gap? 43 Dow Theory 44 Elliott Wave Theory 44 Moving Averages 45 Fifty-Day Moving Average 45 Forty-Week Moving Average 45 Magnets and Targets 46 The Stochastic 46 Other Charts, Technical Indicators, and Money Supply 46 Japanese Candlestick Charts 47 Disadvantages to Moving Averages 47 The Ichimoku Cloud 47 Summary 48 Questions 48 Chapter 7 Reading the Market and Implied Volatility: Market Sentiment 51 Make Money in Any Direction 51 The Concept of Beta 52 When to Be on the Sidelines 53 Questions 54 Chapter 8 Options Basics Primer: What Are Options? 57 What Are Derivatives? 57 What Are Calls and Puts? 57 What Is an Underlying? 59 Options: A Deeper Look 60 Another Example in the GLD 60 Options Premium 61 Options Definitions 62 Option Pricing: Complex Models 62 Questions 64 Chapter 9 The Greeks 67 Delta 67 Gamma 68 Theta 69 Rho 70 Vega 70 Questions 71 Chapter 10 Call and Put Trading Strategies 73 Long Calls 73 Using Calls Bearishly 75 Long Puts 76 Using Puts Bullishly 78 Selling Options 79 Time Decay with Short Options 80 Short Calls 80 Short Puts 82 Deeper Look at OTM Calls and Puts 85 Is Risk versus Reward of the Option Trade Limited or Unlimited? 85 Where Is Breakeven on an Option Trade? 86 Questions 86 Chapter 11 Why Is Everyone Long Stock?: How to Use Options for a Hedge 89 The American Dream 90 I Have Insurance on Almost Everything 91 The Famous Covered Call 92 The Zero-Cost Collar 95 Summary 98 Questions 98 Chapter 12 What Are Synthetic Options Positions? 101 Synthetic Long Stocks 101 Synthetic Long Stock = Long Call + Short Put 103 Synthetic Short Stock = Short Call + Long Put 105 The Goal of Making Synthetics 107 Synthetic Long Call = Long Stock + Long Put Strike Price 107 Synthetic Short Call = Short Stock + Short Put Strike Price 109 Synthetic Long Put = Long Call + Strike Price Short Stock Price 110 Synthetic Short Put = Short Call + Strike Price Long Stock Price 112 Questions 114 Chapter 13 What Is Volatility and How Does It Affect Options? 117 Basics of Volatility and Options Trading 117 Historical Volatility 118 Implied Volatility 118 Volatility Is a Trader s Best Friend 121 CBOE S VIX Index 122 CBOE s VIX: More Than a Fear Indicator 123 Contango versus Backwardation 123 Questions 124 Chapter 14 Various Uses of Options and Why I Love to Trade Them 127 Leverage 127 Flexibility 130 Risk Control 130 Trader s Edge 130 Hedge versus Speculation 131 Complex Options Strategies 132 If Only I Had Bought Those Calls! 133 When in Doubt, Hands Out 134 What It Takes to Make a Bigger Trade 134 Questions 136 Chapter 15 More Complex Options Strategies 139 Long Straddles and Strangles 139 Short Straddles and Strangles: Beware Blowout Risk! 143 Butterflies and Condors 146 Questions 153 Chapter 16 Managing Trades on Expiration 155 Long Call Long the FB November 23 Calls 156 Short Call Short the AAPL November 500 Calls 158 Long Put Long the MSFT November 27 Puts 159 Short Put Short the GOOG November 650 Puts 160 More Complex Trades 161 Long Call Spread Long the FB November 23-25 Call Spread 161 Short Call Spread Short the AAPL November 500-520 Call Spread 162 Long Put Spread Long the MSFT November 27-25 Put Spread 164 Short Put Spread Short the GOOG November 650-630 Put Spread 165 Long Straddle Long the FB Nov 23 Straddle 166 Short Straddle Short the MSFT November 27 Straddle 167 Long Strangle Long the AAPL November 480-500 Strangle 168 Short Strangle Sell the GOOG November 650-670 Strangle 170 Short Iron Condor Selling the FB November 23-21 Put Spread and Selling the FB November 25-27 Call Spread 171 Short Condor Short the MSFT November 27 Straddle and Long the 25 Put 29 Call Strangle 173 Long Call Butterfly Long the FB November 23-25-27 Call Fly 174 Long Put Butterfly Long the MSFT November 27-25-23 Put Fly 176 Questions 178 Chapter 17 Andrew Keene s Non-Blowout Trading Plan: How Much of Your Portfolio Can You Risk? 181 Trading Pepsi Back in the Day 181 Now That I m Upstairs ... 183 Limiting Your Exposure to a Percentage of Your Total Book 184 Andrew Keene s Confidence Scale: Ranking Every Trade from 1 to 5 185 Every Trade Is a Percentage of My Book 188 Andrew Keene s Non-Blowout Trading Plan 189 Questions 192 Chapter 18 Andrew Keene s OCRRBTT Trading Plan 195 Story of the OCRRBTT Trading Plan 195 Reading Options Paper 196 What Call and Put Volume Means to a Trader 197 How Insiders Read Paper 198 Using the OCRRBTT Trading Plan 199 Conclusion 201 Questions 202 Chapter 19 Trading Earnings (HIMCRIBBIT ) 205 HIM: Historical, Implied, Measured 205 Which Type of Option? 207 C: Chart 207 RRBTT: Risk versus Reward, Breakeven, Time, and Target 208 Calendars and Advanced Topics 210 Trading for a Living 210 Confidence Scale 211 Tricks and Tips 212 Questions 215 Conclusion 217 Answers to End-of-Chapter Questions 219 About the Author 223 Index 225