Time is Money: The Power of Non-Directional Options Trading PDF
Preview Time is Money: The Power of Non-Directional Options Trading
TIME IS MONEY The Power Of Non-Directional Options Trading Kerry W. Given, Ph.D. Founder, Parkwood Capital, LLC Co-Founder, G&L Capital Management, LLC Time is Money Copyright ©2015 Kerry W. Given ISBN 978-1622-877-57-7 HC ISBN 978-1622-877-58-4 PRINT ISBN 978-1622-877-60-7 EBOOK LCCN 2014955899 February 2015 Published and Distributed by First Edition Design Publishing, Inc. P.O. Box 20217, Sarasota, FL 34276-3217 www.�irsteditiondesignpublishing.com ALL RIGHTS RESERVED. No part of this book publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means ─ electronic, mechanical, photo-copy, recording, or any other ─ except brief quotation in reviews, without the prior permission of the author or publisher. To Charlotte, my best friend, confidante and adviser. I am a better person due to your influence in my life. In memory of our son and fellow option trader, Sean (1975 - 2007). I miss our discussions of Google. Acknowledgments When I look back over my life to this point, I realize that I owe this book and many other accomplishments to my wife, Charlotte, who has been a wonderful life partner. I am a better person because of her being in my life. Her unwavering support, influence, and excellent advice have been crucial to my success. I owe thanks to many teachers, especially Jim Bittman and Russell Rhoads at the Options Institute of the Chicago Board Options Exchange. My continued conversations with Jim Bittman through the years have been enlightening. His support and advice have been invaluable for both my options trading and the development of this book. Most of all, I wish to thank my students. Their support and encouragement are very much appreciated. Through the years, I have listened to my students and learned of the common misunderstandings and pitfalls that face beginning options traders. My coaching courses and this book are better products as a result. Ray Lilja was my first coaching student in 2007 and that led to the start- up of Parkwood Capital, LLC. His support and encouragement have led to our partnership in founding G&L Capital Management, LLC. Thank you, Ray, for your trust and support. Royal Ellinger, D.D.S., graciously offered to read the first draft of the manuscript and his comments and observations have resulted in this being a much better book. Thank you, Royal, for the time and thought you invested in this project. Table of Contents Acknowledgments Introduction CHAPTER ONE Where Is My Risk? The Opportunistic Model The Insurance Model Non-Directional Trading Summary CHAPTER TWO Who Was Gauss? How Does It Work In Real Life? Calculating Probabilities Using Probabilities In Options Trading Put The Probabilities On Your Side Is Trading Options Gambling? A Zero-Sum Game? Summary CHAPTER THREE The Lowly Stop Loss The 200% Rule Adjusting the Position Why Do We Have To Adjust So Often? Money Management Summary CHAPTER FOUR What Are the Greeks? Individual Option Greeks vs. Position Greeks Which Trade Is Best In This Market? Time Decay: Your Pro�it Machine Managing the Trade With the Greeks Summary CHAPTER FIVE What Are All These Different Volatilities? Implied Volatility As A Measure Of Risk Implied Volatility Skews Implied Volatility and Options Pricing Implied Volatility at the Beginning of the Trade Watch Your Vega! Summary CHAPTER SIX How Do Weekly Options Work? What Do The Greeks Tell Us? What Else Is Different? Possible Strategies With Weekly Options What Can Go Wrong? Summary CHAPTER SEVEN Building the Vertical Spread Effects of Implied Volatility Early Exercise Expiration and Exercise Margin Requirements Selection Of Strike Prices Summary CHAPTER EIGHT The Two Deadly Emotions How Did You Succeed In Life? The Two-Headed Monster Summary CHAPTER NINE Vega Risk Volatility Skews The Search For Candidates Trade Management and Adjustment Early Exercise OTM Calendar Spreads Summary CHAPTER TEN Single Or Double? The Search For Candidates Determining The Optimal Strike Prices Trade Management and Adjustment Summary CHAPTER ELEVEN Constructing The Butter�ly Spread Iron Butter�ly Spreads Margin Requirements Trade Management And Adjustment Back Testing The Butter�ly Trading Systems Closing Butter�ly Spreads CHAPTER TWELVE Building The Double Diagonal Spread Trade Management And Adjustment Back Testing the Double Diagonal Double Diagonals vs. Double Calendars Summary CHAPTER THIRTEEN Building The Condor Spread Building The Iron Condor Spread The Debit Condor vs. The Iron Condor My Condor May Not Be Your Condor The Best Iron Condor Strategy Stocks, Indexes or ETFs? Condor Safety Nets Trade Management And Adjustment Volatility And The Iron Condor Back Testing The Iron Condor Trading Systems Summary CHAPTER FOURTEEN The Myth Of the Best Strategy Consider the Current Market Where Is Volatility? How Does The Trade Make Money? Compare and Contrast The Role of Diversi�ication Summary CHAPTER FIFTEEN Market Crashes Trending Markets My Mistakes Summary CHAPTER SIXTEEN How Does a Market Maker Make Money? Does the Retail Trader Have a Chance? Milking the Cows Summary Introduction Traders love to make predictions. Even better, they enjoy collecting a nice profit when their prediction proves to be correct. This may be the most fundamental sense of satisfaction that traders enjoy. Many successful traders have been interviewed through the years and a common assertion is that making money wasn’t the source of their motivation; they often regard the money as only a “score card” of sorts. The core sense of accomplishment arose from the thrill of the hunt and the satisfaction of having one’s analysis being proven correct. For some traders, the analysis of the fundamentals of a company and/or a market is the principal activity leading to their conclusion to buy a particular stock or an options position on that stock. This may include a detailed analysis of the balance sheet and various financial figures, such as book value, debt to equity ratios, current assets to current liabilities ratios, and many more financial measures. Many fundamental analysts track the price to earning ratio and analyze the business prospects to attempt to predict the future earnings stream. The most famous of the fundamental analysts, Warren Buffett, emphasizes the comparison of the company’s book value to the current stock price. Buffett’s mentor, Benjamin Graham, outlined the best case for fundamental analysis of stocks in his famous book, The Intelligent Investor. Other traders rely on technical analysis, focusing exclusively on the stock’s price chart. John Murphy is one of the best-known technical analysts, and his book, Technical Analysis of the Financial Markets, remains a best seller. The essence of technical analysis is that all of the relevant information for the trader is contained in the stock’s price and volume behavior. Technical analysts draw trend lines, identify levels of support and resistance, analyze candlestick patterns, monitor trading volume, plot the Bollinger bands, calculate various statistical measures, and so on. Many traders employ a combination of both fundamental and technical analysis. Regardless of the techniques used for the analysis, a significant amount of work and study goes into the trader’s thought process that leads to the initiation of the trade.
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