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Advanced Options Trading: Approaches, Tools, and Techniques for Professionals Traders By Kevin Kraus – Instant Download!

Book Description
Active traders today face an environment unlike any before. Sharp movements in stocks, bonds, and currencies have made risk management and trading increasingly complex. Yet these same conditions also create significant opportunities—Advanced Options Trading lays out a comprehensive framework for profiting with options in a highly volatile and unpredictable global market.

Renowned options instructor and brokerage owner Kevin M. Kraus details proven methods for using options to collect premium income, lower stock purchase costs, manage option expenses, and control portfolio exposure—essential techniques for achieving consistent returns in a constantly shifting economy. He also takes a deep dive into the concept of volatility and its impact on both new and experienced options traders.

Inside Advanced Options Trading you’ll discover:

Why forward-looking implied volatility is so important
How to use options to level the volatility playing field
Practical strategies for adding portfolio value while controlling risk
The role of price hedging—and how to implement it effectively
Interest rate options and the key forces driving debt markets
Essential tools and methods for options analysis

Options remain some of the most powerful instruments for hedging, managing risk, and capturing profits—even in turbulent markets. This book equips you with a strong foundation in the options market and the skills needed to trade and manage risk in today’s rapidly changing environment.

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From the Publisher
Kevin M. Kraus is the president of Ember Financial, an online and retail service brokerage firm that offers 24-hour online access, market education, and support. He is the creator of Kevin Kraus’s Option Tutor Course and author of the book How to Start Trading Options. Kevin has more than 20 years of experience in investing, trading, and market education.

From the Back Cover
Consistently profit in unpredictablemarkets with this proven trading technique!

Performed with skill and smarts, options trading is the ideal strategy for profiting in anyeconomy. Advanced Options Trading provides everything you need to ensure you make all theright moves in this complex but lucrative market.

Options master Kevin M. Kraus puts 20 solid years of experience to work in this detailed guide tooptions trading. You’ll find the information necessary for making sure you seize all the opportunitiesafforded by the options market while taking every precaution to protect your portfolio fromserious risk.

Advanced Options Trading covers a wide range of spreads, including:

Bull Call
Bear Put
Ratio Call and Put
Butterfly
Credit
Synthetic
Combination
Calendar
Inter-market
Inter-sector
Cross
Crack Option
Condor
The expansion and contraction of capital in the market has acutely changed the way you mustapproach trading and managing risk. From pricing and options volatility to creating a soundportfolio, Kraus provides a comprehensive guidebook for successfully trading options whilenavigating a choppy market.

About the Author
Kevin M. Kraus is the president of Ember Financial, an online and retail service brokerage firm that offers 24-hour online access, market education, and support. He is the creator of Kevin Kraus’s Option Tutor Course and author of the book How to Start Trading Options. Kevin has more than 20 years of experience in investing, trading, and market education.
Excerpt. © Reprinted by permission. All rights reserved.
ADVANCED OPTIONS TRADING
APPROACHES, TOOLS, AND TECHNIQUES FOR PROFESSIONAL TRADERSBy KEVIN M. KRAUS
The McGraw-Hill Companies, Inc.
Copyright © 2010 Kevin Kraus
All right reserved.

Contents

Chapter One
THE NEW MARKET

Trading in the New Market

Trading in today’s financial environment is more demanding than at any other time in history. Sharp price fluctuations across equities, bonds, currencies, commodities, and their related indices have dramatically increased both market risk and capital requirements. To effectively use options strategies to control portfolio risk and enhance returns, it’s crucial first to understand today’s market landscape and its future direction. Recognizing the types of participants in the market and how their actions influence price movements is a key ingredient of successful trading. It’s also important to appreciate how technological advances and the rising sophistication of individual traders have reshaped investing in recent years.

The dramatic rise in hedge fund and index fund participation, along with their heightened media coverage, has made investors far more aware of these groups’ impact. Financial commentators often blame “the funds” for market volatility—and in some respects, they are right. But these funds face the same elevated risks as everyone else, only on a far larger scale. The critical question becomes: who exactly are “the funds,” and how can you, as an individual investor or portfolio manager, protect your holdings in a climate shaped by global investment flows and institutional trading? Even fund managers themselves must constantly improve their risk management skills to sustain returns in volatile conditions—or risk losing assets to competitors. Understanding the major categories of market participants, how they’re structured, and what motivates their trading is essential.

Hedge Funds

Foremost among these groups are hedge funds, arguably the most powerful segment of the market. Hedge funds are typically private, limited-membership investment vehicles drawing capital from professionals and wealthy individuals. Under U.S. Securities and Exchange Commission (SEC) rules, they’re restricted to “sophisticated” investors and relatively small membership numbers—but their market influence is far from small. Many manage hundreds of millions or even billions of dollars. Because they are not formally registered investment companies, hedge funds enjoy great latitude to invest across stocks, commodities, fixed income, and currencies. This freedom allows them to deploy massive sums into specific sectors, indexes, or even single securities at will.

Hedge funds are also frequent short sellers of stocks and derivatives—borrowing shares or selling futures contracts to repurchase later at lower prices. Short selling is inherently risky, but deep-pocketed funds can dump large positions quickly, sometimes triggering sharp price drops. Savvy hedge fund managers exploit these selloffs to generate profits as competitors and small investors are forced out by program trades and stop-loss orders. While additional regulation may eventually rein in these practices to protect businesses and retail investors, the financial clout of hedge funds ensures they’ll remain powerful players for years to come.

Importantly, hedge funds aren’t limited to short selling. They can hold long-term positions, act as market makers, or even trade intraday. This breadth of strategy makes them a constant source of volatility and unpredictability. And because there’s always a bigger player in the market, even well-capitalized hedge funds must manage risk carefully—often by integrating options strategies into their own risk management frameworks going forward.

Index Funds

Index funds form another powerful segment of the market. Unlike hedge funds, these vehicles are created under SEC regulation as registered investment companies that pool capital from a wide spectrum of investors. Many of these funds follow predetermined formulas or rules for trading. For example, a fund like “ABC1” tracks the S&P 500 index. As a result, it must hold positions that mirror the S&P 500—either directly in the stocks themselves or via representative futures contracts—in proportions dictated by its prospectus. Because its holdings change primarily as its total assets under management rise or fall, rather than in response to market conditions, such a fund tends to influence prices less dramatically and react more slowly to shifts in sentiment than a hedge fund, which can reposition wholesale. However, during recessions or defensive economic periods, a surge of redemptions can still cause meaningful selling pressure in index funds.

Mutual funds are often grouped with index funds because their investment aims typically align with specific objectives such as growth, income, or index tracking. These funds pool vast sums from both retail and institutional investors to build large positions. They provide individuals and businesses with a diversified portfolio in a single vehicle and can target specific industries for those seeking sector exposure without investing directly in individual securities. The fund’s prospectus spells out how it will buy and sell assets to achieve its stated goals. One drawback for short-term traders is that mutual fund shares cannot be redeemed intraday, and their broad diversification generally limits quick gains. Net asset value (NAV) is calculated from the underlying instruments’ daily settlement prices. Mutual funds are therefore best suited for medium- to long-term investors and retirement planning rather than active short-term trading.

Exchange-Traded Funds

Exchange-traded funds (ETFs) are a newer form of index-style investing and have grown rapidly in popularity. They usually carry lower management fees than mutual funds and, crucially, can be bought and sold throughout the trading day. This makes ETFs attractive to active traders who want diversified exposure without sacrificing intraday liquidity. An ETF represents a basket of securities traded as a single share on an exchange, and it can be built around a narrow industry segment, a broad market index, a mix of commodities, or even groups of futures contracts.

One noteworthy trend is the rise of ETF options. These derivatives on ETFs are becoming widely used both for hedging positions and for direct speculation, offering investors additional flexibility—a topic explored in greater detail later.

Pension Funds

Pension funds resemble hedge funds in that they are not strictly bound by a prospectus in allocating their investments. They must, however, file an investment policy statement with regulators and comply with government rules designed to safeguard retirement assets. These funds can allocate capital across nearly any sector but often maintain stakes in the sponsoring company’s stock or related industries. They also tend to invest heavily in conservative, low-yield instruments such as Treasury securities, high-grade corporate bonds, and municipal bonds. The scale can be enormous—the California Public Employees’ Retirement System, for instance, has in recent years managed assets exceeding $260 billion.

Retail Investors and Traders

No segment of the market has changed more over the past decade than retail investing. The rise of online brokerage platforms and round-the-clock market coverage has brought individual traders closer to real-time action than ever before. Today’s investors can make intraday decisions from a home or office computer with ease.

Many broker-dealers now operate primarily online, and electronic trades account for an ever-larger share of total volume. Individual traders have become a factor in volatility, reacting quickly and cheaply to news as it spreads across the internet and modern media. Their moves can indirectly affect index fund holdings as they frequently add or redeem positions in mutual funds and ETFs.

This online universe includes a surprising number of active day traders who buy and sell continuously. While day trading itself is not new, the ease of internet access has attracted a far more diverse and reactive group of participants. Many firms allow these traders to operate with smaller account balances, lowering the financial threshold but also often reducing risk tolerance. Such smaller, faster-moving traders may lack discipline, risk-management skills, or sufficient capital. Unable to hold positions through adverse moves, they may exit prematurely, adding to market fluctuations. Individually they cannot move the market, but acting together in response to major events, they can exert substantial influence.

Beyond the shift in market participants, the evolution of market infrastructure and trade-execution technology has dramatically increased both volatility and the speed with which all participants respond to new information.

Modernization of the Market

One clear result of today’s modernized retail investment market is the unprecedented access individuals now have to trading platforms. This greater access, however, also means that a growing number of less disciplined investors are making quick decisions with relatively small amounts of capital. In the past, small investors often relied on professional trading advisors or registered representatives to help them maintain long-term goals and withstand short-term fluctuations. The decline in the use of professional advice has been one factor contributing to the rise of short-term and intraday volatility.

Another major impact of modernization is sharply lower transaction costs. Online brokerage firms have dramatically reduced fees by replacing large branch networks and armies of employees with servers and IT specialists. With lower costs in equity and derivative markets, smaller investors have become more willing to trade actively and frequently.

Still, there are strong positives. Retail investors are now far more connected to the markets, making finance a more immediate part of everyday life. Daily email statements replace monthly paper mailings, closing the gap between what’s happening in the market and its effect on personal wealth. More importantly, the distance between large and small investors has narrowed. Exchanges such as the Chicago Mercantile Exchange and the Chicago Board of Trade are prime examples of this shift. Where large traders once enjoyed exclusive privileges and floor access, today’s electronic order systems have leveled the playing field. In many electronic contracts, a single-contract trader stands on equal footing with a large institutional participant. Although some services still require high minimum contract sizes, these too are likely to migrate to electronic systems. While the loss of open outcry has reduced the ranks of independent floor traders, narrower bid–ask spreads—especially in thin markets—have compensated small investors to some degree. Many former floor traders now run similar operations electronically.

Government Intervention

Predicting the future of government regulation is difficult. Recent interventions—such as the use of public funds to stabilize sectors—could reshape financial oversight and institutional ownership for years to come. New regulations may restrict or redefine how large investors and funds operate, potentially discouraging them from regulated markets. Higher compliance costs for funds, brokerages, banks, and other institutions may also push private capital toward unregulated or foreign opportunities.

Foreign Participation

Market modernization is a worldwide phenomenon. Foreign investors and governments participate more heavily than ever, and new exchanges are emerging across Asia, Europe, and the Middle East. As the economy globalizes, domestic markets become increasingly sensitive to overseas events.

Agricultural commodities illustrate this point clearly. With modern farming booming worldwide, traders must now track fundamentals from Asia, South America, Europe, and North America alike. Alternative fuels and rising consumption in developing nations put additional pressure on global supply chains. Weather in central South America, for instance, has far more influence on global grain markets today than a decade ago.

Energy markets tell a similar story. The energy crises of recent years have transferred massive amounts of wealth from the U.S. to resource-rich nations. That capital will circulate in global markets for decades, diversifying and deepening the worldwide financial system. Money will flow more quickly between markets in response to events, adding yet another layer of volatility.

Market Psychology

While psychology is not new to the markets, its impact is more visible today than ever before. Later chapters in this book cover the technical aspects of trading options, but before you can profit or manage risk with options, you must accept the unpredictable nature of investor behavior. The “wild card” in any analysis is always the human mind. No model can reliably predict how investors or fund managers will react to every event—or to each other.

Take the late 1990s as an example. You might have opened a short position in silver based on sound technical reasons, only to have a billionaire suddenly pour billions into the metal, upending your trade. No quantitative or fundamental analysis could have foreseen it.

The aftermath of the September 11 attacks offers another lesson. The initial liquidation of capital matched expectations, but the rapid rebound caught many by surprise. Such episodes underline why risk control is essential.

Advanced option trading is about far more than tactics and math. It requires a mature mindset and an awareness of how market psychology shapes price action. Your first step toward understanding the unpredictable market is to understand yourself. In my own 20 years of trading, I’ve found that my greatest challenge isn’t the market—it’s my own reactions when logic fails. Traders frequently abandon positions just before they succeed or hold onto losing trades out of stubbornness, creating a destructive cycle. This is why thousands of “systems” exist to impose discipline on decision making. Developing market discipline is one of the hardest—and most crucial—skills for any trader.

Excerpted from
ADVANCED OPTIONS TRADING
by
KEVIN M. KRAUS
Copyright © 2010 by Kevin Kraus. Excerpted by permission of The McGraw-Hill Companies, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Product details
Publisher ‏ : ‎ McGraw Hill; 1st edition (November 12, 2009)
Language ‏ : ‎ English

Advanced Options Trading: Approaches, Tools, and Techniques for Professionals Traders By Kevin Kraus