Positional Option Trading: An Advanced Guide

COVER
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
	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
	Options and Fundamental Factors
	Post-Earnings Announcement Drift (PEAD)
	Confidence Level Two
	The Overnight Effect
	FOMC and Volatility
	The Weekend Effect
	Volatility of Volatility Risk Premia
	Confidence Level One
	Earnings-Induced Reversals
	Pre-Earnings Announcement Drift
	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
	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
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