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MarkSebastianwithL.CelesteTaylor TradingOptionsforEdge Mark Sebastian with L. Celeste Taylor Trading Options for Edge A Professional Guide to Volatility Trading 2nd Edition ISBN978-3-11-069778-0 e-ISBN(PDF)978-3-11-069786-5 e-ISBN(EPUB)978-3-11-069796-4 LibraryofCongressControlNumber:2022939901 BibliographicinformationpublishedbytheDeutscheNationalbibliothek TheDeutscheNationalbibliothekliststhispublicationintheDeutscheNationalbibliografie; detailedbibliographicdataareavailableontheinternetathttp://dnb.dnb.de. ©2022WalterdeGruyterGmbH,Berlin/Boston Coverimage:Maxger/iStock/GettyImagesPlus Typesetting:IntegraSoftwareServicesPvt.Ltd. Printingandbinding:CPIbooksGmbH,Leck www.degruyter.com Tomyincrediblewifewhoissuchanincrediblemother,businessowner,andsoul mate.Tomyboys,MarkIIandValentino. Acknowledgments Thereareafewpeoplewithoutwhomthisbookcouldnothavebeenpublished.I’d like to start with Celeste Taylor, who, as my co-writer, helped me put thought to paper;JeffPepper,whobelievedinthisbookandencouragedmetowriteasecond edition;mymaineditor,JayaDalal,whostuckwiththesecondeditionandpushed metocompleteit;andmytecheditor,StevenAntoch,whoabsolutelyimprovedthe detail and quality. In addition to the team of people who helped make this book possible, I would like to acknowledge some individuals who have pushed me throughoutmycareertobettermyself: Myparents,JohnandKathleenSebastian Myin-laws,KirkandAnnaEliason Mybrotherandsisters,Nicole,John,andMichelle My partners in Option Pit and my fund, Adam Paris, Andrew Giovinazzi, and SamHarris JoshuaHawesandBretHolmes My partners at Hedge Spectrum Press, Paul King, Frank Gregory, Jason Pell, andHannahSelner MyteamatOptionPit,KaylaSmith,DanielBrock,LiciaLeslie,ColetteVoyard, BillGriffo,andTedTrapuzzano Mytradingmentor,ScottKaplan GarrettBaldwin,LauraDunbar,ElizabethVolk,andBobKeppel The professors who pushed me into this direction within finance, Dr. Shawn andDr.ShellyHowton CatherineClayandtheCBOELiveVolteam MybrokerageteamatMatrixExecutionledbyMattBenson MarkLongooftheOptionsInsider DennisChen RandyYoung PatJohnson ThetradersIgettobewitheverydayatOptionPit.com https://doi.org/10.1515/9783110697865-202 Foreword After 25 years of studying financial markets, I can’t stress enough how unprece- dentedthe25monthsbetweenMarch2020andApril2022were. Inalittlemorethantwoyears,weexperiencedaseriesofmini-epicevents(on topofaglobalpandemic)thatincluded: – A2008-stylefinancialcrash(March2020) – Asudden,monsterbullmarketfueledbytheFed’s$5trillionquantitativeeas- ing(April2020toNovember2021),parallelingour2009–2018Fed-drivenrally – AquickDot-comstylecollapseofgrowthstocks(November2021toApril2022) – Red-hot1979-levelinflation(late2020toApril2022) – AnenergycrisisthatmirroredtheOPEC-fueledtensionsof1973 Itisasifweshoved40yearsoffinancialturmoilintothistwo-yearstretch. And we’re still in the early innings of a significant realignment in the global marketsinadebt-soaked,post-COVIDworld. As of this writing, there remains greater uncertainty ahead as the Federal Re- serve prepares to unwind a $9 trillion balance sheet built up over more than a decade. Most people would read the facts above, slam this book shut, pack their bags, and flee from the city. But informed, prepared traders can’t wait for what lies ahead. Ifyou’restillwithus,Iremindyouthatuncertainty,volatility,andthecoming realignmentinthemarketscouldprovideaonce-in-a-lifetimeopportunitytoprofit inoptionstrading. Atatimewhenmoremarketparticipantsthaneveraretradingoptions,nowis thetimetoturnincreasedliquidityandvolatilityintoyouropportunity. TradingOptionsforEdgewillshowyouhow. Whetheryou’reanexperiencedtraderorsomeonejustlearningaboutthevalue ofleverageandoptionstrading,educationremainsyourprimarytooltooutperform themarketsandoverperformyourexpectations. I’vebeenfortunateinmycareertoworkwithmanybrillianttraders,academics, investors, and market enthusiasts. Over 25 years, I’ve traveled the world meeting with investors and traders who enthusiastically share their so-called “edge” – or whattheybelievewillallowthemtooutperformthemarkets. Outofthousandsofconversationsandinteractions,Iwouldhighlighttwopeo- ple who have taught me – on a personal level – the critical tools required for suc- cessfuldailyoptionstrading. ThefirstwasElieCanetti,agraduateschoolprofessorandadvisortotheInter- national Monetary Fund (IMF). The man has so much brainpower that they gave him the title: Advisor, Western Hemisphere Department. They gave him half of the worldtoanalyze. https://doi.org/10.1515/9783110697865-203 X Foreword In my coursework, Canetti was essential to my fundamental understanding of optionstheoryandhelpedmeunderstandtheadvancementsinbehavioraleconom- icsandfinance. Butthatexperiencewasincoursework. There is a massive difference between learning financial theory and trading “application.” Thinkofitasthedifferencebetweenknowingthatfishexist(theory)andlearn- inghowtofishwithconfidence(application). Withtradingapplication,I’mtalkingabouttheabilitytodeveloptradingideas, build conviction and confidence, establish a risk management strategy, and click that“Buy”or“Sell”button. MyadvancementintheapplicationiswhereMarkSebastian,mysecondinflu- encer,enterstheconversation. Mark’sbackgroundspeaksforitself. He’sa former marketmaker at the AmericanStock Exchange(AMEX) andChi- cagoBoardOptionsExchange(CBOE).Inaddition,he’sasuccessfulco-founderand managerofavolatilityarbitragehedgefund,KarmanLineCapital,andthefounder oftradingandmentoringconsultancyOptionPit. Mark and I each spent a decade navigating the world of Chicago commodity, futures and derivatives trading, hedge fund consulting, and options education withouthavingcrossedpaths. Years later, dozens of mutual colleagues have praised his trading skills and acumenintheChicagoandNewYorktradingcommunities. I finally met Mark in 2021 in collaboration with a new project called Money MorningLIVE! We launched a live, daily trading network that produces about seven hours of content designed to help traders manage risk, identity trades, and profit. Over the last 12 months, our collaboration has helped countless traders improve their skills, boosttheirconfidence,andidentifywinningtrades.ThepraiseforMarkthatIseein ourcommentssectionandinletterstoourteamisproofofhiscommitmenttohelp- inganyone–fromanybackground–findindependenceandsuccessintrading. Even after years of trading, I too have learned an exceptional amount from Mark. Mostofmyformercolleaguesinfinancialmediahaveadeepunderstandingof long-term investing, macroeconomics, and general headlines. Mark, however, can takesmallamountsofinformation,navigateanoptionschain,andidentifyahigh- probability,high-profitpotentialtradeinseconds. Inaddition,hecanprovideinstantriskmanagementrecommendations.Defin- ingyourriskandrewardisessentialtoeverysingletrade,andthisapplicationisa cornerstoneofMark’sstrategies. Thatapplicationiscriticaltome.IdislikelosingmorethanIliketowin.