Vertical Option SpreadsA Study of the 1.8 Standard Deviation Inflection Point
Wiley Trading 1. Aufl.
Make trades on vertical options spreads with the precision of a laser beam Vertical Options Spreads is a combination of a bona-fide academic research-based study and a complete method to trade credit and debit spreads, along with other complex option combination trades such as iron condors and butterflies. Here, the author has accumulated five years of daily data on the ETF, SPY and provided historical evidence of actual win rates at specific multiples of entry points, both in time and price level. For example, traders will be able to use the weekly options, pick a level of risk and return desired, learn how to place the trade, and then discover the actual percent return that the trade would have yielded. This must-have resource includes the basics of option trading and contains references to many excellent works by other authors that explore more about the intricacies of option mechanics and trading. It is far more than an analysis of one specific asset, SPY, featuring a study of probability theory and how it has applied to trading over the past five years, including the highly volatile 2007 to 2009 time frame and the more "normal" 2010 to 2012 time period. The book offer a thorough understanding of how price movement, actual volatility, and implied volatility all provide a complex but workable web in which the informed trader can generate excellent returns. However, the trader must have the discipline to act within the confines of probability and the "law" of large numbers refusing to place trades based on gut feelings or hunches. Offers high-probability based trading that uses the new weekly options Contains handy interactive worksheets that allow traders to select their own risk/return with precision Includes a website with daily and weekly information on the estimate of the actual standard deviation points on the price spectrum Vertical Options Spreads offers traders a research-based guide for trading Standard & Poors 500 ETF, SPY using historic and estimated probabilities and returns that will give them an edge in the marketplace.
Preface ix Chapter 1 Introduction 1 Chapter 2 How to Be a Wizard 11 Chapter 3 Trading Platforms 29 Chapter 4 Vertical Spreads and the Iron Condor 37 Chapter 5 Structuring a Trade 49 Chapter 6 A Brief Visit with the Greeks 65 Chapter 7 Risk and Psychology of Investing and Spread Trading 69 Chapter 8 Normal Distribution, Probability, and Modern Financial Theory 93 Chapter 9 The 1.8 Standard Deviation Solution 111 Chapter 10 More Using Your Crystal Ball and Probability 169 Chapter 11 Conclusion 231 References 237 About the Website 239 Index 241
Dr. CHARLES CONRICK IV has an extensive background in the business, finance, and trading environment. After a long career in investment planning and small to mid-size business valuation, he entered the academic world in 2002 and is now an Associate Professor of Finance at Dickinson State University in Dickinson, North Dakota. Charles has also been an active options trader for the past five years. He holds a Doctorate in Business Administration (DBA) from Argosy University with a double major in accounting and finance. He is a Chartered Financial Analyst (CFA), a Certified Public Accountant (CPA), and a Certified Financial Planner (CFP). SCOTT HANSON is an accounting professor at a regional university and is an active trader in the options market. Prior to arriving in academia, he held several key financial positions in U.S. corporations and spent some time as an auditor with PricewaterhouseCoopers. Hanson is a CPA, and earned an MBA from Golden Gate University and a master's of accounting from the University of Georgia.
Modern financial markets are traded by talented individuals as well as large institutions with substantial resources. So if you're serious about making money in this arena, you need to find some sort of edge. Nobody understands this better than coauthors Charles Conrick IV and Scott Hanson. Both are experienced options traders who have worked in senior positions in finance and accounting, and are currently university professors in the field of finance. In 2009, they set out to find a realistic trading edge and began researching a way to marry the concept of probability under finite time conditions to a rationally measured return. The introduction of the new weekly options issued by the CBOE in June 2010 provided the ideal vehicle for their concept. Now, in Vertical Option Spreads: A Study of the 1.8 Standard Deviation Inflection Point, they share their hard-won knowledge with you and detail a rational system that combines the concept of probability with options trading to help maximize your return on capital risked. Opening with an informative discussion of the journey that led the authors to the "1.8 Standard Deviation Solution," this reliable resource quickly moves on to evaluate different trading platforms, ranging from their chosen spread trading platform, eOption, to more sophisticated ones. From there, it explains spreads—including the vertical spread, which is the workhorse of the 1.8 SD strategy—and iron condors, and provides a brief summary of the "Greeks." The authors also take the time to review important elements of probability theory as well as Modern Portfolio theory to provide the proper grounding required for the assumptions of the 1.8 Standard Deviation Solution. With that information in hand, you'll be introduced to this powerful trading approach, where the vagaries of the market can be estimated under a very small margin of error and the probability of finding winning trades can be more effectively calculated. Along the way, you'll become familiar with Oracle's Crystal Ball (CB), and how it can be used to assess probabilities on various credit spreads using the Trading Spreadsheet (TS) provided in this book. It also expands on the use of CB with the TS on a number of different option positions. A companion website has also been developed in conjunction with this book. It contains more examples of the probability calculations that the authors work with, some background information, and items related to weekly options trading. No one can guarantee your trading success, but there are ways to put the odds in your favor. Let Vertical Option Spreads show you how.
Praise for Vertical Option Spreads "An interesting read and practical how-to manual on harnessing the power of probability trading." —Jerry Kensok, CFP®, President/Portfolio Manager, Lewis & Clark Fund Advisers, LLC "Conrick and Hanson break new ground in applying Monte Carlo simulation techniques to the field of options trading. We're thrilled that Crystal Ball is featured prominently throughout the book as a way for traders to make sound decisions based solely on probability and without regard to market direction. I trust that the ideas and methods put forth in this book will become part of your good fortune." —Eric Wainwright, Chief Architect, Crystal Ball Software Division, Oracle "As a CPA and informed investor, I, like the authors, attempted a few investing techniques including use of technical indicators and fundamental financial analysis. My preferred approach was that of an intermediate term investor (weeks to months), and my results were inconsistent. The alternative approach detailed in this book offers a possible solution. The reliance on probabilities helps compensate for the various personal biases investors confront. Combining the rich data analysis with short (weekly) exposure windows presents an intriguing opportunity to manage risk. The power of this approach is further unlocked for each trader by allowing customization of risk tolerance for each trade as the situation merits." —Joe Hanson, commercial banking officer
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