Trading Options as a Professional: Techniques

The options market allows savvy investors to assume risk in a way that can be very profitable, if the right techniques are used with the proper insight. InTrading Options as a Professional, veteran floor trader James Bittman provides both full-time and professional traders with a highly practical blueprint for maximizing profits in the global options market. ..This peerless guide helps you think like a market maker, arms you with the latest techniques for trading and managing options, and guides you in honing your proficiency at entering orders and anticipating strategy performance. Most importantly, it gives you access to one of the world's leading educators and commentators as he candidly defines the seven trading areas that are essential for successful options traders to master: .. Option price behavior, including the Greeks. Volatility. Synthetic relationships. Arbitrage strategies. Delta-neutral trading. Setting bid and ask prices. Risk management ..You will benefit from Bittman's exceptional understanding of volatility, his perceptive examples from the real world, and the dozens of graphs and tables that illustrate his strategies and techniques. Each chapter is a complete, step-by-step lesson, and, collectively, give you the best toolbox of profit-making solutions on the options trading floor. ..In addition,Trading Options as a Professionalcomes with Op-Eval Pro, a powerful software that enables you to analyze your trades before you make them by calculating implied volatility, graphing simple and complex options strategies, and saving analyses to review later. ..Don't be left guessing on the sidelines--trade with the confidence of a market maker by following the road map to higher profits inTrading Options as a Professional. .

James B. Bittman is a senior instructor at The Options Institute, which is the educational arm of the Chicago Board Options Exchange (CBOE).

Acknowledgments	p. xv
Introduction: Learning to Trade Options as a Professional	p. xvii
Option Market Fundamentals	p. 1
Fundamental Terms	p. 1
The Market-Definition 1	p. 10
The Market-Definition 2	p. 11
National Best Bid and Best Offer	p. 13
Margin Accounts and Related Terms	p. 16
Profit/Loss Diagrams	p. 19
Summary	p. 29
Operating the Op-Eval Pro Software	p. 31
Overview of Program Features	p. 31
Installing the Software	p. 32
Choices of Pricing Formulas	p. 34
Features of Op-Eval Pro	p. 35
The Single Option Calculator	p. 36
Calculating Implied Volatility	p. 39
The Spread Positions Screen	p. 39
Theoretical Graph Screen	p. 42
Theoretical Price Table	p. 44
The Portfolio Screen	p. 45
The Distribution Screen	p. 46
Summary	p. 48
The Basics of Option Price Behavior	p. 49
The Insurance Analogy	p. 49
Option Pricing Formulas	p. 53
Call Values and Stock Prices	p. 54
Put Values and Stock Prices	p. 56
Call Values Relative to Put Values	p. 59
Option Values and Strike Price	p. 60
Option Values and Time to Expiration	p. 62
Time Decay Is Complicated	p. 64
Time Decay and Volatility	p. 64
Option Values and Interest Rates	p. 67
Option Values and Dividends	p. 69
Option Values and Volatility	p. 69
Extreme Volatility	p. 71
Dynamic Markets	p. 71
Three-Part Forecasts	p. 72
Trading Scenarios	p. 72
Summary	p. 75
The Greeks	p. 77
Overview	p. 77
Delta	p. 78
Gamma	p. 80
Vega	p. 83
Theta	p. 85
Rho	p. 87
How the Greeks Change	p. 89
How Delta Changes	p. 92
How Gamma Changes	p. 99
How Vega Changes	p. 104
How Theta Changes	p. 108
How Rho Changes	p. 111
Position Greeks	p. 118
Summary	p. 131
Synthetic Relationships	p. 135
Synthetic Relationships	p. 135
Synthetic Long Stock	p. 137
Synthetic Short Stock	p. 139
Synthetic Long Call	p. 141
Synthetic Short Call	p. 144
Synthetic Long Put	p. 146
Synthetic Short Put	p. 148
When Stock Price [not equal] Strike Price	p. 151
The Put-Call Parity Equation	p. 153
Applying the Effective Stock Price Concept	p. 155
The Role of Interest Rates and Dividends	p. 156
Summary	p. 160
Arbitrage Strategies	p. 163
Arbitrage-the Concept	p. 163
The Conversion	p. 165
Pin Risk	p. 167
Pricing a Conversion	p. 168
Pricing a Conversion with Dividends	p. 173
Pricing Conversions by Strike Price	p. 176
The Concept of Relative Pricing	p. 177
The Reverse Conversion	p. 178
Pricing a Reverse Conversion	p. 181
Pricing a Reverse Conversion with Dividends	p. 185
Box Spreads	p. 188
The Long Box Spread	p. 188
Pricing a Long Box Spread	p. 193
The Short Box Spread	p. 196
Pricing a Short Box Spread	p. 199
Summary	p. 203
Volatility	p. 205
Volatility Defined	p. 206
Historic Volatility	p. 206
Another Look at Daily Returns	p. 213
Realized Volatility	p. 216
The Meaning of "30 Percent Volatility"	p. 216
Converting Annual Volatility to Different Time Periods	p. 217
Calendar Days Versus Trading Days	p. 220
Implied Volatility	p. 222
Expected Volatility	p. 230
Using Volatility	p. 231
"Overvalued" and "Undervalued"	p. 232
An Alternative Focus	p. 234
Volatility Skews	p. 234
Summary	p. 238
Delta-Neutral Trading: Theory and Reality	p. 241
Delta-Neutral Defined	p. 242
The Theory of Delta-Neutral Trading	p. 247
Delta-Neutral Trading-Long Volatility Example	p. 248
Delta-Neutral-Trading-Short Volatility Example	p. 256
Simulated "Real" Delta-Neutral Trade 1	p. 263
Simulated "Real" Delta-Neutral Trade 2	p. 267
Delta-Neutral Trading-Opportunities and Risks for Speculators	p. 272
Delta-Neutral Trading-Opportunities and Risks for Market Makers	p. 275
Summary	p. 277
Setting Bid-Ask Prices	p. 279
The Theory of the Bid-Ask Spread	p. 280
The Need to Adjust Bid and Ask Prices	p. 284
The Process of Adjusting Bid and Ask Prices	p. 285
The Limit on Adjusting Bid and Ask Prices	p. 288
Estimating Option Prices as Volatility Changes	p. 290
Expressing Bid and Ask Prices in Volatility Terms	p. 292
Trading Exercises Introduced	p. 294
Exercise 1: Buying Calls Delta-Neutral	p. 296
Exercise 2: Creating a Butterfly Spread in Three Trades	p. 298
Exercise 3: Creating a Reverse Conversion in Two Trades	p. 302
Exercise 4: Creating a Long Box Spread in Two Trades	p. 306
Summary	p. 310
Managing Position Risk	p. 311
Calculating Position Risks	p. 312
Managing Directional Risk with Delta	p. 314
Vertical Spreads versus Outright Long Options	p. 320
Vertical Spreads-How the Risks Change	p. 321
Greeks of Delta-Neutral Positions	p. 327
Neutralizing Position Greeks	p. 329
Neutralizing Greeks when Interest Rates Are Positive	p. 333
Establishing Risk Limits	p. 337
Summary	p. 340
Epilogue	p. 343
Index	p. 345
Table of Contents provided by Ingram. All Rights Reserved.

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Trading Options as a Professional: Techniques for Market Makers and Experienced Traders

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