Option Strategy Risk / Return Ratios

Option Strategy Risk / Return Ratios PDF

Author: Brian Johnson

Publisher:

Published: 2014-04-22

Total Pages: 206

ISBN-13: 9780692028292

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Written by Brian Johnson, a professional investment manager with many years of trading and teaching experience, Option Strategy Risk/Return Ratios introduces a revolutionary new framework for evaluating, comparing, adjusting, and optimizing option income strategies. Drawing on his extensive background in option-pricing and on decades of experience in investment management and trading, Brian Johnson developed these tools specifically to manage option income strategies. Unlike crude rules-of-thumb, these revolutionary new tools can be applied to any option income strategy, on any underlying security, in any market environment. Risk and return are timeless concepts in finance and trading, but this is the first time both concepts have been integrated successfully into a consistent approach for managing option income strategies. Option Strategy Risk/Return Ratios is written in a clear, easy-to-understand fashion and explains how to apply risk/return ratios to condors, butterflies, calendars, double diagonals, and even hybrid income strategies. Created especially for investors who have some familiarity with options, this practical guide begins with an examination of option income strategies and is followed by a review of the option Greeks, the building blocks of option risk management. Next, a critique of common adjustment triggers lays the foundation for a detailed explanation of these exciting new tools: option strategy risk/return ratios. Each option income strategy is explained, evaluated, and ranked using these new tools with complete descriptions and graphical examples. The book includes over sixty separate graphs and tables to illustrate how risk/return ratios behave using specific strategy examples in actual market conditions. The risk/return ratios are then used to introduce a new hybrid strategy that combines the best characteristics of the other income strategies. Finally, the last chapter examines practical considerations and prospective applications of these innovative new tools. Not only are the formulas provided for every calculation, but each risk/return ratio is explained intuitively and depicted graphically. For traders who are not mathematically inclined, Option Strategy Risk/Return Ratios also includes a link to an Excel spreadsheet with macros designed to calculate all of the risk/return ratios introduced in the book. About the Author: Brian Johnson designed, programmed, and implemented the first return sensitivity based parametric framework actively used to control risk in fixed income portfolios. He further extended the capabilities of this approach by designing and programming an integrated series of option valuation, prepayment, and optimization models. Based on this technology, Mr. Johnson founded Lincoln Capital Management's fixed income index business, where he ultimately managed over $13 billion in assets for some of the largest and most sophisticated institutional clients in the U.S. and around the globe. He later served as the President of a financial consulting and software development firm, designing artificial intelligence-based forecasting and risk management systems for institutional investment managers. Mr. Johnson is now a full-time proprietary trader in options, futures, stocks, and ETFs primarily using algorithmic trading strategies. In addition to his professional investment experience, he also designed and taught courses in financial derivatives for both MBA and undergraduate business programs. He has written articles for the Financial Analysts Journal, Active Trader, and Seeking Alpha and he regularly shares his trading insights and research ideas as the editor of www.TraderEdge.Net. Mr. Johnson holds a B.S. degree in finance with high honors from the University of Illinois at Urbana-Champaign and an MBA degree with a specialization in Finance from the University of Chicago Booth School of Business.

Option Strategy Hedging and Risk Management

Option Strategy Hedging and Risk Management PDF

Author: Brian Johnson

Publisher:

Published: 2017-03-25

Total Pages: 128

ISBN-13: 9780996182324

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Brian Johnson, an investment professional with over 30 years of experience, is the author of three pioneering books on options: 1) Option Strategy Risk / Return Ratios, 2) Exploiting Earnings Volatility, and 3) Option Income Strategy Trade Filters. His new in-depth (80+ page) article, Option Strategy Hedging and Risk Management, presents a comprehensive analytical framework and accompanying spreadsheet tools for managing and hedging option strategy risk. Drawing on his extensive background in option-pricing and on decades of experience in investment management and trading, Brian Johnson developed these practical techniques to hedge the unique and often overlooked risks associated with trading option strategies. These revolutionary new tools can be applied to any option strategy, in any market environment. Option Strategy Hedging and Risk Management is written in a clear, easy-to-understand fashion and explains how to apply market-specific hedging techniques, using several different hedging vehicles. Created especially for readers who have some familiarity with options, this practical guide begins with a review of position sizing, including a detailed analysis of the implicit assumptions and embedded risks that could have disastrous consequences, particularly for option traders. Chapter 2 includes a comprehensive description and analysis of the actual option strategy, position model, and trade rules that are used to create real-world option strategy hedges in the subsequent chapters. This is followed by a thorough explanation and a concrete example of how to use futures to hedge option strategy exit risk. Surprisingly, futures are not well understood in the option community and very few traders employ this simple, effective, and virtually free hedging tool. The next two chapters present a common analytical and hedging framework that is used to identify the most cost-effective hedging solutions for an actual option strategy in a real-world market environment. The process used to identify the lowest-cost hedging solution using actual VIX call options is explained in Chapter 4, followed by the same hedging analysis using put options on the underlying security in Chapter 5. All hedging examples in the article use real-time market prices and actual analytical results. Proprietary research is included in the article to provide validation for the analytical framework. The article was written to be accessible to a wide audience, so very few mathematical formulas are provided in the text. However, several important formulas are included to facilitate the understanding of important concepts, and to provide further research opportunities for inquisitive traders. The article also includes thirty separate graphs and tables to illustrate how the tools can be used in practice. Perhaps most important, Option Strategy Hedging and Risk Management includes a download link to the accompanying Excel spreadsheet with macros designed to perform all of the position sizing and hedging calculations in the article. Chapters 1, 3, 4, and 5 all have their own dedicated tabs in the spreadsheet. The data from the article is included in the spreadsheet, which allows the reader to reproduce all of the examples from the article. All of the spreadsheet functions are automated through the use of push-button macros, making spreadsheet operation as simple as possible. Finally, Chapter 6 examines practical considerations and prospective applications of these innovative new tools.

Option Income Strategy Trade Filters

Option Income Strategy Trade Filters PDF

Author: Brian Johnson

Publisher:

Published: 2016-11

Total Pages: 110

ISBN-13: 9780996182317

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Brian Johnson, a professional investment manager with many years of trading and teaching experience, is the author of two pioneering books on options: 1) Option Strategy Risk / Return Ratios: A Revolutionary New Approach to Optimizing, Adjusting, and Trading Any Option Income Strategy, and 2) Exploiting Earnings Volatility: An Innovative New Approach to Evaluating, Optimizing, and Trading Option Strategies to Profit from Earnings Announcements. His new in-depth (100+ page) article, Option Income Strategy Trade Filters, represents the culmination of years of research into developing a systematic framework for optimizing the timing of Option Income Strategy (OIS) trades. His research was based on the analysis of 15,434 OIS trades, each with a comprehensive set of objective, tradable entry and exit rules. The results for each of the 15,000 plus trades were scaled to a constant dollar amount at risk, to ensure all trades were equally-weighted when calculating the performance metrics. The back-test results were all based on actual option prices and are summarized in this article for a selection of back-testing filters, making this one of the most comprehensive studies of option income strategy results ever published. The results of over 100 different back-tests are provided. The OIS strategy back-test results for ten different types of filters are evaluated in this article, including unique filter combinations that delivered exceptional results. A custom market-edge hypothesis was created in advance for each filter type, which was then used to evaluate the filter-specific results. This critical step helped identify robust, exploitable relationships, rather than spurious correlations. Several of the resulting filters generated over 95% winning trades, with average returns of over six percent per trade (including losing trades). The ratios of cumulative gains to cumulative losses were over 20 to 1 for a few of the best performing filters. Option Income Strategy Trade Filters is written in a clear, understandable fashion and provides detailed examples of how to create and test market-edge hypotheses using the recent advances in back-testing software. Very few formulas were included. As a result, the material in the article should be accessible to all option traders. Useful for traders with a wide range of option trading experience, this practical guide begins with a detailed review of option income strategies, including basic examples that provide the requisite foundation for subsequent chapters. Portions of this crucial background material also appeared in Brian Johnson's first book: Option Strategy Risk / Return Ratios. Chapter 2 includes a comprehensive description of the option income strategy, position model, and trade plan used to generate the back-test data. Every entry and exit rule is explained in detail, including actual graphical examples. The performance metrics for the 15,434 unfiltered OIS trades are summarized at the end of this chapter, which provide a performance benchmark for evaluating the effectiveness of the trade filters introduced in the next three chapters. The trade filters are grouped by classification, with a chapter devoted to each class or type. The market-edge hypotheses and corresponding results for trend filters are analyzed in Chapter 3. Unlike trend filters, discriminating filters exclude an increasing percentage of trades as the filter condition or threshold becomes more extreme or restrictive. The discriminating filter market-edge hypotheses and results are analyzed in Chapter 4. Chapter 5 is devoted entirely to a very unique and powerful example of a discriminating filter: the OIS Universal Filter (OISUF). The final chapter examines practical considerations and prospective applications of trade filters and other resources in managing option income strategies in actual market conditions.

Option Strategies for Earnings Announcements

Option Strategies for Earnings Announcements PDF

Author: Ping Zhou

Publisher: FT Press

Published: 2012-10-15

Total Pages: 258

ISBN-13: 0132947404

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By trading on corporate earnings, investors can reliably profit in both up and down markets, while avoiding market risk for nearly the entire quarter. In this book, two leading traders and portfolio managers present specific, actionable techniques anyone can use to capture these sizable profits. Ping Zhou and John Shon have performed an unprecedented empirical analysis of thousands of stocks, reviewing tens of millions of data points associated with option prices, earnings announcement returns, and fundamentals. Their massive analysis has identified consistent opportunities associated with focusing on the magnitude of the market’s reaction to earnings, not its direction. Option Trading Set-Ups for Corporate Earnings News offers concrete guidance for improving the likelihood of making correct forecasts, and managing the risks of incorrect forecasts. It introduces several ways to exploit option trading opportunities around earnings news, discuss crucial issues that most retail investors haven’t considered, and explore aspects of earnings-related option trading that have never been empirically examined and documented before. For example, they identify hidden patterns and potential opportunities based on valuation, industry, volatility, analyst forecasts, seasonality, and trades that immediately follow earnings announcements. Simply put, trading on earnings reports offers immense profit opportunities, if you know how. This book provides incontrovertible facts and detailed strategies, not just theories and anecdotes!

Exploiting Earnings Volatility

Exploiting Earnings Volatility PDF

Author: Brian Johnson

Publisher:

Published: 2015-04-08

Total Pages: 256

ISBN-13: 9780996182300

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Exploiting Earnings Volatility introduces an innovative new framework for evaluating, optimizing, and trading option strategies to profit from earnings-related pricing anomalies. Leveraging his extensive background in option-pricing and decades of experience in investment management and trading, Brian Johnson developed this inventive approach specifically to design and manage option earnings strategies. In an Active Trader article titled "Modeling Implied Volatility," Mr. Johnson introduced a formula for aggregating discrete volatility measures into a single metric that can be used with conventional option pricing formulas to accurately model implied volatility before and after earnings announcements. The practical application of this formula has profound implications for option trading and strategy development. Exploiting Earnings Volatility is written in a clear, understandable fashion and explains how to use this novel approach to 1) solve for the expected level of earnings volatility implicitly priced in an option matrix, 2) calculate historical levels of realized and implied earnings volatility, 3) develop strategies to exploit divergences between the two, and 4) calculate expected future levels of implied volatility before and after earnings announcements. Furthermore, Exploiting Earnings Volatility also includes two Excel spreadsheets. The Basic spreadsheet employs minimal input data to estimate current and historical earnings volatility and utilizes those estimates to forecast future levels of implied volatility around earnings announcements. The Integrated spreadsheet includes a comprehensive volatility model that simultaneously integrates and quantifies every component of real-world implied volatility, including earnings volatility. This powerful tool allows the user to identify the precise level of over or undervaluation of every option in the matrix and to accurately forecast future option prices and option strategy profits and losses before and after earnings announcements. The Integrated spreadsheet even includes an optimization tool designed to identify the option strategy with the highest level of return per unit of risk. Written specifically for investors who have familiarity with options, this practical guide begins with a detailed review of volatility and an explanation of the aggregate implied volatility formula. A separate chapter provides a conceptual and mathematical explanation of "True Greeks," accurate measures of risk and return sensitivity that reflect the real-world behavior of options. New option Greeks that are specific to earnings announcements are also introduced. Four chapters explain how to use the Basic and Integrated spreadsheets and two chapters document trade examples that use actual market data and analytical results from both spreadsheets to design a unique option strategy to exploit earnings-related pricing and volatility anomalies. The final chapter examines practical considerations and prospective applications of these innovative new tools. This book introduces a new analytical framework that may sound complicated at first, but is really quite intuitive. The formulas presented in the book are limited to basic high-school algebra. Mathematical relationships are also explained intuitively and depicted graphically. Most important, you will not need to perform any of these calculations manually. Exploiting Earnings Volatility includes a link to Excel spreadsheets that perform all of the calculations described in the book. The unique price and volatility behavior of options before and after discrete earnings announcements is an enigma to most option traders, even to many professionals. The aggregate volatility formula is relatively simple, but it has profound implications. When integrated with a real-world volatility model, it offers unique insights into earnings volatility, price behavior, option strategy construction, and prospective value-added opportunities.

Stocks for Options Trading

Stocks for Options Trading PDF

Author: Harvey Friedentag

Publisher: CRC Press

Published: 1999-12-22

Total Pages: 220

ISBN-13: 9780910944076

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From basic option terms, to finding the best optionable stocks, to a winning investment plan creating and utilizing an option portfolio, Stocks for Options Trading: Low-Risk, Low-Stress Strategies for Selling Stock Options Profitably provides low stress tactics designed to make predictable profits when the stock market moves up, down, or sideways. Once learned these strategies allow you to accumulate assets steadily, and reach your investment goals. It clearly explains the features and risk/reward characteristics of basic options transactions, as well as hedging, tax benefits, correct use of margin and trading strategies. With this book you can create a portfolio that: Increases profitability Protects stock holding from a decline in market price Places other people's money in your account Lets you buy more stock for less Positions you for big market moves Profits from stock price swings Receives tax benefits from an option income portfolio If you have dabbled in the stock market but had little or no success, made small gains, or worse, lost money, if you want to stop worrying about the safety of your stocks while enjoying comfortable tax-advantaged returns from your holdings Stocks for Options Trading: Low-Risk, Low-Stress Strategies for Selling Stock Options Profitably is for you! The strategies discussed provide low-stress tactics designed to make predictable profits no matter what the state of the market. Most investors, lawyers, stockbrokers, bankers, lawyers, financial planners, and accountants know only one side of options - the buying side, which is risky. Friedentag covers the less familiar side - the renting and selling side; the profitable conservative way. Using the strategies he suggests, you could be making millions of dollars selling covered call options. Stocks for Options Trading: Low-Risk, Low-Stress Strategies for Selling Stock Options Profitably provides a map, a step-by-step guide to successful investing. Using his simple approach, you will save time and money. About the Author: The author is a registered Investment Advisor (IRA) with the United States Securities and Exchange Commission and has been managing personal portfolios professionally since 1986. Mr. Friedentag has been certified as a Federal Court expert witness on stock trading; is an acknowledged expert on stock renting; the use of derivatives (exchanged-traded equity call options); and serves as a President of the Contrarian Investment Club in Denver, Colorado. He is also the author of Investing Without Fear: Options (International Publishing Corp., Chicago).

Option Strategies

Option Strategies PDF

Author: Courtney Smith

Publisher: John Wiley & Sons

Published: 2008-10-24

Total Pages: 321

ISBN-13: 0470370475

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Updated and revised to include a decade of growth in the scope and complexity of options, Options Strategies: Profit-Making Techniques for Stock, Stock Index, and Commodity Options, 3rd Edition is a comprehensive guide to options trading strategies written in clear, non-technical language. In addition to insight into options issues like carrying changes, strike prices, commissions, interest rates, and break-even points, new chapters show how to predict the direction of implied volatility. Accessible examples, charts, and graphs will help you obtain the information you need to succeed in the high-risk, high-profit world of options.

Options

Options PDF

Author: Simon Vine

Publisher: John Wiley & Sons

Published: 2011-08-24

Total Pages: 271

ISBN-13: 1118160967

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The key concepts and essential strategies behind the successful use of options Written by Simon Vine, a seasoned trader who has over ten years of experience on Wall Street under his belt, Options is the definitive book on options for traders, investors, and risk professionals. Options provides a step-by-step approach to trading, hedging, and investing using options, and shares the key concepts essential to successful options use. Options also explores how to use a wide variety of options strategies and shows readers how to select the strategy that best fits their own psychological risk profile. Filled with real-world examples and proven strategies, this invaluable resource will be of interest to all professionals-and newcomers-who'd like to exploit options for strategic advantage, risk management, or profit. Simon Vine (Moscow, Russia) is deputy head of the investment banking division at Alfa Bank, the largest private financial institution in Russia. He holds an MBA from Columbia Business School and a BA from the Institute for Finance and Economics in Moscow.

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