How to Price and Trade Options

AL SHERBIN has been a professional options trader for over 26 years without a single losing year and is the Managing Member of Al on Options, LLC.

• Introduction xiChapter 1 Why Trade Options? 1Strategic without Being Directional 2A Word about Leverage 2Options are a Decaying Asset 5Insurer or Insured? 6Probability of Making Money 6Market Efficiency 7Tired, Worn‐Out Metaphors 9Chapter 2 What to Look for in a Broker 11Brokerages versus Banks 11Depth of a Broker’s Pockets 12Trading Risk Management 13Learning from Recent Events 14Account Types 14Commissions 16Interest Rates 18Stock Borrow and Loan 19Trading Platforms 22Conclusion 24Chapter 3 Building the Foundation 25Option Pricing Models 26Option Pricing Model Inputs 27Historical Data as Input into the Implied Volatility of an Underlying 29Implied Volatility as a Predictor of Stock Movement and Probabilities 30The Distribution Curve 31Breakout Stocks 45Actual versus Historical Distribution Curves 50Chapter 4 Trade Probabilities: What to Look For 55The Results 59How to Calculate Option Probabilities 63Chapter 5 Choosing Your Trades 67Choosing Your Underlying 67Making an Assumption 78Chapter 6 Choosing a Strategy 83Defined Risk Trades 85Credit Spreads 85Debit Spreads 88Butterfly 89Iron Condor 91Calendar Spreads 92Undefined Risk Trades 96The Straddle 97The Strangle 97Short Naked Puts 98Ratio Spreads and Back Spreads 100What Time to Expiration Should My Trades Have? 103Trading Earnings Announcements 105Chapter 7 Exiting Trades 123The Variables 123The Kelly Criterion 125Morning Routine 130To Log Your Trades or Not to Log Your Trades 135Chapter 8 Executing Your Trades 141Order Types 142Chapter 9 Portfolio Management 153Two Types of Risk 154The Goal: Diversification—Minimizing Unique Risk 155The Methods: Correlation and Number of Positions 156Identifying and Mitigating Systematic Risk 163Trade Sizing 180Early Exercise 183Conclusion 189About the Website 191About the Author 193Index 195