Keene on the market : trade to win using unusual options activity, volatility, and earnings

233 Pages·2013·0.81 MB·English

by  Andrew Keene

K M
EENE ON THE ARKET
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K
EENE ON THE
M
ARKET
Trade to Win Using Unusual Options
Activity, Volatility, and Earnings
Andrew Keene
Cover image: © iStockphoto.com/polygraphus
Cover design: Paul McCarthy
Copyright © 2013 by Andrew Keene. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data:
Keene, Andrew, 1979-
Keene on the market : trade to win using unusual options activity, volatility, and earnings /
Andrew Keene.
1 online resource. — (Wiley trading series)
Includes index.
Description based on print version record and CIP data provided by publisher; resource not viewed.
ISBN 978-1-118-59073-7 (pdf) – ISBN 978-1-118-59075-1 (epub) – ISBN 978-1-118-59076-8 (cloth)
1. Options (Finance)–United States. 2. Speculation--United States. 3. Chicago Board Options
Exchange. I. Title.
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
CONTENTS
Preface xiii
Acknowledgments xix
CHAPTER 1 Introduction 1
I Love to Trade 1
From Young Clerk to Respected Market Maker 2 v
Trading Career at the CBOE 3
The AAPL King 4
From Trading Pit Hotshot to Retail Trader 5
The Live Trading Room: From Options 101
to Complex Strategies 6
Questions 7
CHAPTER 2 The Life of a Professional Trader 9
Perks of Being a Trader 10
Not Quite as Glamorous as Everyone Thinks 11
The Rollercoaster of Trading 11
This Is Not Monopoly Money 12
It Takes Money to Make Money 12
The Setup 13
Trading Expenses and Opportunity Cost 14
Sticking to a Plan 15
Questions 15
CHAPTER 3 Trading for a Living: Hobby or Career? 17
Trading for Amusement 17
Enjoying Your Profits 18
Moving from Amateur to Professional 19
Moving from Simulated Account to Real Trading 19
Moving from Simple to Complex Strategies 20
Investing in Your Options Education 20
Go Slow, Go Pro 21
Defining Goals 22
Questions 22
CHAPTER 4 Who the Players Are: Market Makers 25
DPMs 26
The Death of Market Makers 26
Retail Traders 27
Hedge Funds 28
Institutional Traders 29
Options Exchanges 30
Questions 31
vi
CHAPTER 5 Options Brokers and Platforms: The Right
S Options Broker for You 33
T
N
E
T Full-Service Brokers and Options Trading 34
N
O Discount Brokerage Firms 35
C
Researching Discount Brokers Firms 36
Options Brokerage Firms’ Fees 37
Use of Margin 37
Automatic Liquidation 38
Questions 39
CHAPTER 6 Technical Trading: Security Timing Tactics 41
Support and Resistance Levels 43
What Is a Gap? 43
Dow Theory 44
Elliott Wave Theory 44
Moving Averages 45
Fifty-Day Moving Average 45
Forty-Week Moving Average 45
Magnets and Targets 46
The Stochastic 46
Other Charts, Technical Indicators, and
Money Supply 46
Japanese Candlestick Charts 47
Disadvantages to Moving Averages 47
The Ichimoku Cloud 47
Summary 48
Questions 48
CHAPTER 7 Reading the Market and Implied
Volatility: Market Sentiment 51
Make Money in Any Direction 51
The Concept of Beta 52
When to Be on the Sidelines 53
Questions 54
CHAPTER 8 Options Basics Primer: What Are Options? 57
What Are Derivatives? 57
What Are Calls and Puts? 57
What Is an Underlying? 59
Options: A Deeper Look 60 vii
Another Example in the GLD 60 C
O
Options Premium 61 N
T
Options Definitions 62 E
N
T
Option Pricing: Complex Models 62 S
Questions 64
CHAPTER 9 The Greeks 67
Delta 67
Gamma 68
Theta 69
Rho 70
Vega 70
Questions 71
CHAPTER 10 Call and Put Trading Strategies 73
Long Calls 73
Using Calls Bearishly 75
Long Puts 76
Using Puts Bullishly 78
Selling Options 79
Time Decay with Short Options 80
Short Calls 80
Short Puts 82
Deeper Look at OTM Calls and Puts 85
Is Risk versus Reward of the Option Trade
Limited or Unlimited? 85
Where Is Breakeven on an Option Trade? 86
Questions 86
CHAPTER 11 Why Is Everyone Long Stock?: How to Use
Options for a Hedge 89
The American Dream 90
I Have Insurance on Almost Everything 91
The Famous Covered Call 92
The Zero-Cost Collar 95
Summary 98
Questions 98
CHAPTER 12 What Are Synthetic Options Positions? 101
viii
Synthetic Long Stocks 101
S Synthetic Long Stock = Long Call + Short Put 103
T
N
E Synthetic Short Stock = Short Call + Long Put 105
T
N The Goal of Making Synthetics 107
O
C Synthetic Long Call = Long Stock +
Long Put – Strike Price 107
Synthetic Short Call = Short Stock +
Short Put – Strike Price 109
Synthetic Long Put = Long Call +
Strike Price – Short Stock Price 110
Synthetic Short Put = Short Call +
Strike Price – Long Stock Price 112
Questions 114
CHAPTER 13 What Is Volatility and How Does It Affect
Options? 117
Basics of Volatility and Options Trading 117
Historical Volatility 118
Implied Volatility 118
Volatility Is a Trader’s Best Friend 121
CBOE’S VIX Index 122
CBOE’s VIX: More Than a Fear Indicator 123
Contango versus Backwardation 123
Questions 124
CHAPTER 14 Various Uses of Options and Why I
Love to Trade Them 127
Leverage 127
Flexibility 130
Risk Control 130
Trader’s Edge 130
Hedge versus Speculation 131
Complex Options Strategies 132
“If Only I Had Bought Those Calls!” 133
When in Doubt, Hands Out 134
What It Takes to Make a Bigger Trade 134
Questions 136
CHAPTER 15 More Complex Options Strategies 139
ix
Long Straddles and Strangles 139
Short Straddles and Strangles: Beware C
O
Blowout Risk! 143 N
T
E
Butterflies and Condors 146 N
T
Questions 153 S
CHAPTER 16 Managing Trades on Expiration 155
Long Call—Long the FB November 23 Calls 156
Short Call—Short the AAPL November 500 Calls 158
Long Put—Long the MSFT November 27 Puts 159
Short Put—Short the GOOG
November 650 Puts 160
More Complex Trades 161
Long Call Spread—Long the FB
November 23-25 Call Spread 161
Short Call Spread—Short the AAPL
November 500-520 Call Spread 162
Long Put Spread—Long the MSFT
November 27-25 Put Spread 164
Short Put Spread—Short the GOOG
November 650-630 Put Spread 165
Long Straddle—Long the FB Nov 23 Straddle 166
Short Straddle—Short the MSFT
November 27 Straddle 167
Long Strangle—Long the AAPL
November 480-500 Strangle 168
Short Strangle—Sell the GOOG
November 650-670 Strangle 170
Short Iron Condor—Selling the FB
November 23-21 Put Spread and Selling
the FB November 25-27 Call Spread 171
Short Condor—Short the MSFT
November 27 Straddle and Long the
25 Put–29 Call Strangle 173
Long Call Butterfly—Long the FB
November 23-25-27 Call Fly 174
Long Put Butterfly—Long the MSFT
November 27-25-23 Put Fly 176
Questions 178
x
CHAPTER 17 Andrew Keene’s Non-Blowout Trading Plan:
S
T
N How Much of Your Portfolio Can You Risk? 181
E
T
N
O Trading Pepsi Back in the Day 181
C
Now That I’m Upstairs . . . 183
Limiting Your Exposure to a Percentage
of Y our Total Book 184
Andrew Keene’s Confidence Scale: Ranking Every
Trade from 1 to 5 185
Every Trade Is a Percentage of My Book 188
Andrew Keene’s Non-Blowout Trading Plan 189
Questions 192
CHAPTER 18 Andrew Keene’s OCRRBTT Trading Plan 195
Story of the OCRRBTT Trading Plan 195
Reading Options Paper 196
What Call and Put Volume Means to a Trader 197
How Insiders Read Paper 198
Using the OCRRBTT Trading Plan 199