Keene on the Market

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 Andrew@KeeneOnTheMarket.com.

• Preface xiiiAcknowledgments xixChapter 1 Introduction 1I Love to Trade 1From Young Clerk to Respected Market Maker 2Trading Career at the CBOE 3The AAPL King 4From Trading Pit Hotshot to Retail Trader 5The Live Trading Room: From Options 101to Complex Strategies 6Questions 7Chapter 2 The Life of a Professional Trader 9Perks of Being a Trader 10Not Quite as Glamorous as Everyone Thinks 11The Rollercoaster of Trading 11This is Not Monopoly Money 12It Takes Money to Make Money 12The Setup 13Trading Expenses and Opportunity Cost 14Sticking to a Plan 15Questions 15Chapter 3 Trading for a Living: Hobby or Career? 17Trading for Amusement 17Enjoying Your Profits 18Moving from Amateur to Professional 19Moving from Simulated Account to Real Trading 19Moving from Simple to Complex Strategies 20Investing in Your Options Education 20Go Slow, Go Pro 21Defining Goals 22Questions 22Chapter 4 Who the Players Are: Market Makers 25DPMs 26The Death of Market Makers 26Retail Traders 27Hedge Funds 28Institutional Traders 29Options Exchanges 30Questions 31Chapter 5 Options Brokers and Platforms: The Right Options Broker for You 33Full-Service Brokers and Options Trading 34Discount Brokerage Firms 35Researching Discount Brokers Firms 36Options Brokerage Firms’ Fees 37Use of Margin 37Automatic Liquidation 38Questions 39Chapter 6 Technical Trading: Security Timing Tactics 41Support and Resistance Levels 43What is a Gap? 43Dow Theory 44Elliott Wave Theory 44Moving Averages 45Fifty-Day Moving Average 45Forty-Week Moving Average 45Magnets and Targets 46The Stochastic 46Other Charts, Technical Indicators, and Money Supply 46Japanese Candlestick Charts 47Disadvantages to Moving Averages 47The Ichimoku Cloud 47Summary 48Questions 48Chapter 7 Reading the Market and Implied Volatility: Market Sentiment 51Make Money in Any Direction 51The Concept of Beta 52When to Be on the Sidelines 53Questions 54Chapter 8 Options Basics Primer: What are Options? 57What are Derivatives? 57What are Calls and Puts? 57What is an Underlying? 59Options: A Deeper Look 60Another Example in the GLD 60Options Premium 61Options Definitions 62Option Pricing: Complex Models 62Questions 64Chapter 9 The Greeks 67Delta 67Gamma 68Theta 69Rho 70Vega 70Questions 71Chapter 10 Call and Put Trading Strategies 73Long Calls 73Using Calls Bearishly 75Long Puts 76Using Puts Bullishly 78Selling Options 79Time Decay with Short Options 80Short Calls 80Short Puts 82Deeper Look at OTM Calls and Puts 85Is Risk versus Reward of the Option Trade Limited or Unlimited? 85Where is Breakeven on an Option Trade? 86Questions 86Chapter 11 Why is Everyone Long Stock?: How to Use Options for a Hedge 89The American Dream 90I Have Insurance on Almost Everything 91The Famous Covered Call 92The Zero-Cost Collar 95Summary 98Questions 98Chapter 12 What are Synthetic Options Positions? 101Synthetic Long Stocks 101Synthetic Long Stock = Long Call + Short Put 103Synthetic Short Stock = Short Call + Long Put 105The Goal of Making Synthetics 107Synthetic Long Call = Long Stock + Long Put – Strike Price 107Synthetic Short Call = Short Stock + Short Put – Strike Price 109Synthetic Long Put = Long Call + Strike Price – Short Stock Price 110Synthetic Short Put = Short Call + Strike Price – Long Stock Price 112Questions 114Chapter 13 What is Volatility and How Does It Affect Options? 117Basics of Volatility and Options Trading 117Historical Volatility 118Implied Volatility 118Volatility is a Trader’s Best Friend 121CBOE’S VIX Index 122CBOE’s VIX: More Than a Fear Indicator 123Contango versus Backwardation 123Questions 124Chapter 14 Various Uses of Options and Why I Love to Trade Them 127Leverage 127Flexibility 130Risk Control 130Trader’s Edge 130Hedge versus Speculation 131Complex Options Strategies 132“If Only I Had Bought Those Calls!” 133When in Doubt, Hands Out 134What It Takes to Make a Bigger Trade 134Questions 136Chapter 15 More Complex Options Strategies 139Long Straddles and Strangles 139Short Straddles and Strangles: Beware Blowout Risk! 143Butterflies and Condors 146Questions 153Chapter 16 Managing Trades on Expiration 155Long Call—Long the FB November 23 Calls 156Short Call—Short the AAPL November 500 Calls 158Long Put—Long the MSFT November 27 Puts 159Short Put—Short the GOOG November 650 Puts 160More Complex Trades 161Long Call Spread—Long the FB November 23-25 Call Spread 161Short Call Spread—Short the AAPL November 500-520 Call Spread 162Long Put Spread—Long the MSFT November 27-25 Put Spread 164Short Put Spread—Short the GOOG November 650-630 Put Spread 165Long Straddle—Long the FB Nov 23 Straddle 166Short Straddle—Short the MSFT November 27 Straddle 167Long Strangle—Long the AAPL November 480-500 Strangle 168Short Strangle—Sell the GOOG November 650-670 Strangle 170Short Iron Condor—Selling the FB November 23-21 Put Spread and Selling the FB November 25-27 Call Spread 171Short Condor—Short the MSFT November 27 Straddle and Long the 25 Put–29 Call Strangle 173Long Call Butterfly—Long the FB November 23-25-27 Call Fly 174Long Put Butterfly—Long the MSFT November 27-25-23 Put Fly 176Questions 178Chapter 17 Andrew Keene’s Non-Blowout Trading Plan: How Much of Your Portfolio Can You Risk? 181Trading Pepsi Back in the Day 181Now That I’m Upstairs . . . 183Limiting Your Exposure to a Percentage of Your Total Book 184Andrew Keene’s Confidence Scale: Ranking Every Trade from 1 to 5 185Every Trade is a Percentage of My Book 188Andrew Keene’s Non-Blowout Trading Plan 189Questions 192Chapter 18 Andrew Keene’s OCRRBTT Trading Plan 195Story of the OCRRBTT Trading Plan 195Reading Options Paper 196What Call and Put Volume Means to a Trader 197How Insiders Read Paper 198Using the OCRRBTT Trading Plan 199Conclusion 201Questions 202Chapter 19 Trading Earnings (HIMCRIBBIT ) 205HIM: Historical, Implied, Measured 205Which Type of Option? 207C: Chart 207RRBTT: Risk versus Reward, Breakeven, Time, and Target 208Calendars and Advanced Topics 210Trading for a Living 210Confidence Scale 211Tricks and Tips 212Questions 215Conclusion 217Answers to End-of-Chapter Questions 219About the Author 223Index 225