Options Trading : The Hidden Reality
Published on February 14, 2007
Options Trading : The Hidden Reality
Contrary to popular way of sharing things that made options look very easy, I am going to share something that is NOT easy. Please don’t jump to the end of post, allow me to take you there slowly.
Today I am going to recommend something that has completely changed the way I looked at option. I am thankful to my friend Krishna S., founder of White Knight Capital who referred this amazing book to me.
Before we begin, Let me advise that DON’T READ THIS BOOK IF:
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A word of caution to beginner traders, please don’t buy it yet. Test the option strategy simulator I mentioned here, understand the strategies first and only then get into details. This book in my opinion assumes that reader already knows advance stuff (may not be advance from author’s perspective)
This book will test reader’s mettle. Generally speaking, I am an avid reader and can digest financial literature like yummy sweet-n-sour soup, but this book required patience and perseverance.
This book, titled “Options Trading: The Hidden Reality”, is written by Charles M Cottle, also known as Risk doctor and has been written from Market maker’s perspective. Charles was x-floor trader. He has also written other widely popular books in the investment circle (“Coulda, woulda, shoulda” and “Option: Perception and Deception). Once one understands the concepts and knows how market makers play options trading game, it certainly gives edge to the retail investor. This book extensively covers ‘position adjustments” and “hedging” as well. Slingshot hedging is one of the best examples that I used several times to convert a losing trade into profitable one.
Charles peeled Options like onions, layer after layer and has opened the hidden reality of option trading to common retail investor. I am again mentioning that it’s a tough book but once understood, one can create his/ her own adjustment plans on a piece of paper without even looking at Option simulator. My drawing skills are not good and hence I need a simulator. Jokes apart, the book helped me visualize options and adjustments graphically inside my brain.
I am not affiliated with the author. The only reward I can expect is referral fee from Amazon should you decide to buy as a token of appreciation for my portal. Whatever mode you choose, buy it on my portal or elsewhere, or borrow it from library but always keep a pen and paper with you. Please read it like a workbook and take your own time to understand the concepts.
The book has covered literally everything, from nuts and bolts of the options to advance strategies like strangles, straddles, verticals, collars, wingspread and so on. There is a special chapter on hybrid hedging as well. The best part of the book is option dialogue, real trade examples, trader’s mistakes and risk adjustment plans suggested by Charles.
Enjoy and I wish you profitable trading,
OptionPundit
Hi Option Pundit,
Sounds like a great book, will order it later today from AMZN through your site. Your site is really informative.
What do you think of playing backspreads on days like today on SPY or Qs? Might be a good way to profit from a big move and IV should not crush. Or would a Strangle/straddle be better?
Well, that could have been a good trade on Qs, entered just before Bernanke. Especially now, with pennies, you get some really good fills on Qs. Will think about it next time.
I have another comment, this time about your earnings plays. You should look into “short call calendar spread ” instead of the backspreads. You benefit also from a strong move but you also benefit from a drop in volatility.
I was looking at NTRI: Buy Feb 40 calls, sell Mar 40 calls. A 60% drop in IV on the Feb, and a 30% drop on the March, will give you a profitable position, no matter what.
Hi,
OP. I enjoy reading your blog. I have Cottle’s book and have tried SlingshotHedge on one of my core holdings. His mind is way ahead of mine, and his book is not very easy to digest.
One concept that I have trouble with is about his Slingshot strategy. After you put on a credit call spread, and the stock has risen past the high strike call, how do you take profit on your position? I understand that Slingshot is synthetically a Butterfly + high strike call. So, in theory, when stock is now about the higher call strike, the embedded Butterfly is worth very little, but the higher strike call now worth a lot. One can take profit by selling the higher strike call. But, what do you do with the Butterfly position left and you still want to hold on to the stock?
Thanks
Tom
I hope you guys took the trade on NTRI 🙂
Response to Tom (Feb 14th, 2007 at 4:12 pm)
It depends on the situation — your bullishness or bearishness — your time horizon — prevailing prices. You can take the profits on the extra call “kicker” that is now deep ITM or you can roll it up and out further. On a retracement the butterfly could come back to life but probably, the short call spread is at full value or has not much more to lose (leave it alone) and initiate the sale of a deferred month vertical and an initiation of a new put (the original is worthless).
In effect, you want to roll the whole package forward to where there is a likelihood that the butterfly will maximize with the opportunity to be in for the ride in the event a protracted move ensues.
Look at the Cisco story that is similar in the Ri$k Doctor Forums (use visitor for a user name and visitor for the password if you do not feel like posting):http://www.riskdoctor.com/cgi-bin/forum/ikonboard.cgi?s=ec2fa32eb4af41417536228c8a10653e;act=ST;f=1;t=576;hl=csco
I didn’t have to read long to know that I liked your blog. First of all, it is very well organized and the cost of a custom site tells me you are serious about building an option community. Second, it is not filled with hype. I’ve been trading options for 17 years (the last 5 as a pro) – it’s a tough business. There are many many snakeoil salesman in this space and I appreciate those who tell it like it is. I hope you will visit http://www.1option.com and consider a recip link. I’ve spent a great deal of time building my archive of educational articles. I look forward to commenting on your future posts.
Pete, thank you for your kind words. It’s a pleasure to have appreciation from someone of your caliber. You are correct, my efforts are driven to build a community around options trading and develop a network with the like minded friends. I look for value and try bringing the best, as per my efforts, to my readers. I hope you will enjoy my blog and find something to share with your readers as well.
It will be my pleasure to have your comments on my posts.
Profitable trading,
OptionPundit
A similar question (…call ‘kicker’ going ITM, leaving a nearly worthless butterfly…) was asked after a free webinar I just recorded
http://www.riskdoctor.com/cgi-bin/forum/ikonboard.cgi?s=d171a94b1645fe264fda92a79056ad20;act=ST;f=33;t=630:
“What adjustment or rolling can I do if the stock goes up high enough that my “Kicker” goes ITM while I am still bullish and I want to protect some of my gains?”
Here is one answer and it is a follow on from the CSCO discussion…
http://www.riskdoctor.com/cgi-bin/forum/ikonboard.cgi?act=ST;f=1;t=576
…where a guy originally had the 20/22.5/25 Slingshot and the stock rallied big (went over 29). The call ‘kicker’ was the 25 strike that went ITM. So why not sell the 27.50/30 call vertical spread 20 times (i.e. Slingshot the extra 25 call). That creates another butterfly and a new kicker at 30.
I am often asked, what do you do with the nearly worthless butterfly? Leave it alone, probably, if it is too cheap to sell. It could come back to some descent value to salvage later.
Here is the dissection of the new trades and dissections with the yellow highlight:
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I’m very interested in this book.Does it has free trial?
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