ANDREW KEENE was an independent equity options trader at the Chicago Board Options Exchange for eleven years. He spent most of that time as a market maker in over 125 stocks, including Apple, GE, Sears Holdings, and Goldman Sachs. From 2006-2009, Andrew was the largest independent on-the-floor Apple options trader in the world. Currently, he actively trades futures, equity options, currency pairs, and commodities. Over the last few years, Andrew has become one of the CBOE's most recognized faces in the media, appearing regularly on Bloomberg TV's Street Smart, CNBC's Squawk on the Street, nationally syndicated First Business, and CBOE TV's In the Money with Angela Miles. Andrew received a BS in finance with a concentration in accountancy from the University of Illinois. He can be contacted at [...].

Preface xiii

Acknowledgments xix

Chapter 1 Introduction 1

I Love to Trade 1

From Young Clerk to Respected Market Maker 2

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

Chapter 5 Options Brokers and Platforms: The Right Options Broker for You 33

Full-Service Brokers and Options Trading 34

Discount Brokerage Firms 35

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

Another Example in the GLD 60

Options Premium 61

Options Definitions 62

Option Pricing: Complex Models 62

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

Synthetic Long Stocks 101

Synthetic Long Stock = Long Call + Short Put 103

Synthetic Short Stock = Short Call + Long Put 105

The Goal of Making Synthetics 107

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

Long Straddles and Strangles 139

Short Straddles and Strangles: Beware Blowout Risk! 143

Butterflies and Condors 146

Questions 153

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

Chapter 17 Andrew Keene's Non-Blowout Trading Plan: How Much of Your Portfolio Can You Risk? 181

Trading Pepsi Back in the Day 181

Now That I'm Upstairs . . . 183

Limiting Your Exposure to a Percentage of Your 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

Conclusion 201

Questions 202

Chapter 19 Trading Earnings (HIMCRIBBIT ) 205

HIM: Historical, Implied, Measured 205

Which Type of Option? 207

C: Chart 207

RRBTT: Risk versus Reward, Breakeven, Time, and Target 208

Calendars and Advanced Topics 210

Trading for a Living 210

Confidence Scale 211

Tricks and Tips 212

Questions 215

Conclusion 217

Answers to End-of-Chapter Questions 219

About the Author 223

Index 225