Subject:

Are you interested in a book that provides a very comprehensive coverage of the tastytrade method of trading options?

## Exercise leverage and work to manage risk with options

Would you like to have a powerful software package that performs most of the calculations you might need to support your trading? I used to view many videos from TastyTrade website to understand their trading methodology. There are so many videos that I have to view on and off and they are not in very organised manner. I later found a book that is written according to TastyTrade trading methodology.

This book is my best reference whenever I want to trade options.

Check out this book, Trade Options with an Edge from Dr. Russell Richards.

## Opening an options trading account

It is available in E-book form, softcopy and hardcopy at Amazon.com. The software comes with the book. If you have Excel you can run the software.

It includes the Black-Scholes option pricing model, greeks, evaluation metrics for new positions, management of existing positions, pairs trading, calendars/diagonals, risk profiles, IV estimation, BPR determination, futures, exploration of P&L response surface, lists of ETFs, tax estimation, and much more. The book pulls together in one place most of what tastytrade advocates.

The book covers basic information about options including all of the common strategies, the option pricing model, and the greeks.

It then discusses six sources of edge for sellers of option premium. Then it shows the reader how to select equities that take advantage of the combined edge, how to decide on the best strategy, how to determine the risk and to size the trade, how to place the order, and how to monitor and manage the trade.

Each decision can be totally mechanical, based on the values of one or more metrics.

And the software provided with the book computes all of the metrics that you will need.

Here is the table of contents of this great book:

{source 0}**Chapter 1.** Is This Book for You? 1

The Growth of Small Consistent Gains 2

Why Options?

3

Who Can Benefit from This Book? 4

Probability-Based Approach 5

Why Most Option Traders Lose Money 7

How Is My Approach Different? 8

Executing the Strategies Described in This Book 9

Next 11**Chapter 2** My Investment Journey 12

Why You Should Follow My Options Investing Approach 12

Mutual Fund Investor 13

Buy-and-Hold Investor 14

Fundamental Analysis Phase 16

Technical Analysis Phase 17

Managed Account 19

Trading Options 20

The Typical Investment Book 21

Next 22**Chapter 3** Option Basics 23

Definitions 23

Leverage 24

Buy or Sell / Long or Short?

26

Breakeven Prices 27

Risk Profile 28

Intrinsic and Extrinsic Value 30

“Moneyness” 30

The Option Chain 31

Exiting Option Positions 32

Option Price Terminology 33

Next 33**Chapter 4** Option Pricing 34

The Probability Distribution of Future Stock Prices 34

Lognormal Distribution for Stock Prices 35

Probability of Profit and Probability of Being In the Money 37

Standard Deviation of Stock Prices 38

Black-Scholes Option Pricing Model 40

Implied Volatility 42

The Option Greeks 45

Delta 45

Theta 46

Vega 47

Gamma 47

Basic Facts about the Greeks 48

Screenshot from Book Software 49

Conclusion 51

Next 51**Chapter 5** The Core Option Strategies 52

Introduction 52

Buying Power Reduction 52

The Six Core Strategies 53

Buy or Sell Calls and Puts 53

Vertical Spreads 53

Risk Profiles and Breakeven Prices for Vertical Spreads 56

Long or Short?

57

Probability of Profit 57

Vertical Spread Terminology 58

Calendar Spreads 59

Covered Writes 62

Synthetic Equivalences 65

Summary 66

Next 66**Chapter 6** Named Option Strategies 67

Straddle 68

Strangle 68

Butterfly 69

Put Ratio Spread 71

Call Ratio Spread 72

Iron Condor 73

Jade Lizard 74

Diagonal 75

Married Put 76

Protective Collar 77

Super Bull 78

Super Bear 79

Sunny Side Up 80

Balanced vs Unbalanced Option Positions 81

Stock Price Regions 83

Double Calendar/Double Diagonal 84

How Should You Begin?

85

Option Wheel 86

Conclusion 89

Next 90**Chapter 7** What Is Our Edge? 91

Selling Premium 91

Collecting Time Decay 92

Expected Profit 92

Efficient Markets 93

Expected Return of an Option Trade 94

Impact of Overestimation of Standard Deviation on

Profitability 98

What about Actual Results? 99

Implied Volatility Reversion to the Mean 101

Probability of Touch 103

Manage Winners 104

Doing the Smart Things and Sweating the Small Stuff 105

The Casino Analogy 106

Translating the Edge into Profits 107

Putting Less than 100% of One’s Portfolio at Risk 108

Conclusion 108

Next 109**Chapter 8** Select Underlyings for Trading 110

Schools of Thought 111

Fundamental Analysis 111

Technical Analysis 112

Contrarian Investing 113

Reversion to the Mean 114

Momentum Investing 115

Blended Approach 115

Liquidity 116

Implied Volatility and Implied Volatility Rank 119

Implied Volatility Reversion to the Mean 120

IV Percentile 122

Watchlist 123

Using Your Watchlist 126

Correlation 127

Diversification and Modern Portfolio Theory 128

Other Forms of Diversification 131

The Advantages of Exchange-Traded Funds (ETFs) 132

Summary 134

Checklist for Placing a Trade 134

Next 134**Chapter 9** Select Candidate Strategies 135

Formulating Your Assumptions 135

Match Option Strategies to the Assumptions 137

Impact of Type of Account on Option Strategies 138

Trading a Restricted Account 139

Risk Tolerance 143

Use IV and IVR to Determine If the Position

Should be Long or Short 144

Commissions 145

Conclusion 146

Pulling It All Together 147

Next 148**Chapter 10** Evaluate Candidate Strategies 149

Evaluation Metrics 149

Maximum Profit 149

Maximum Loss (or Risk) 150

Buying Power Reduction 150

Breakeven (B/E) Values 151

Probability of Profit (POP) 151

Theta Efficiency 152

Delta Efficiency 152

Risk Profile 153

Return on Capital (ROC) and ROC/Day 153

Using the Excel Software to Evaluate a Position 154

Using the Metrics 155

Synthetic Equivalences and Substitutions 158

Next 161**Chapter 11** Placing the Trade 162

Getting on the Board 162

Select the Expiration Cycle 162

Option Chain 164

Select the Strikes 166

An Iterative Process for Strike Selection 169

Enter the Strategy 175

Decide on the Entry Price Target 176

Position Sizing 177

Avoiding Large Drawdowns 179

Type of Order 180

The Duration of the Order 181

The Final Step: Submit the Order, Confirm, and Send 182

Next 182**Chapter 12** Directional Bias of Your Portfolio 184

Correlation 184

Beta 185

Revisiting Delta 186

Beta-Weighted Deltas 188

Beta-Weighted Gamma 191

Monitoring the Portfolio Risk 191

Exploring Portfolio Delta Changes 193

A Personal Experience 197

Next 198**Chapter 13** Monitoring Your Portfolio 199

What Portfolio Information Should You Have?

## Book Description

200

Overall Portfolio Metrics 201

Individual Stock Positions 202

Evaluating Individual Positions 204

Options Expiring ITM 207

Binary Events 208

Hedging a Portfolio 208

Next 209**Chapter 14** Managing Winning Trades 210

Alternatives for Managing Your Trades 210

Exiting Winning Trades 212

Defining the Profit Target 213

Exiting Covered Write Trades 216

Studies on Exiting Winning Trades 218

Probability of Reaching a Profit Target 222

Distribution of Time to Reach a Profit Target 223

Exiting Winning Trades Separately or as a Package 224

Managing Trades That Don’t Become Winners

Until Close to Expiration 225

Summary 226

Next 227**Chapter 15** Managing Losing Trades 228

Responding When Trades Go Bad 228

Debunking Common Wisdom (Stop Losses) 229

Managing Your Losing Trade 234

Defined Risk and Undefined Risk Trades 236

Capital Reduction Trades 237

Managing Losing Undefined-Risk Trades 238

Estimating the Risk of an Undefined-Risk Trade 238

What Actions Can Be Taken?

239

Understanding the Evolution of Losing Trades 240

Consider Pr(Touch PR) before Exiting a Losing Trade 241

Rolling Losing Trades 243

Going Inverted on Rolls 247

Adjusting Profit Exits When Rolling 248

Other Adjustments 249

Managing Losing Defined-Risk Trades 251

To Adjust or Not to Adjust?

That Is the Question! 253

Trade Expectations 255

The P&L Over the Lifetime of a Trade 257

Summary 258

Next 258**Chapter 16** Trading IRAs and Other Restricted Accounts 259

Introduction 259

Restrictions 259

Comparison of Strangles with Iron Condors 260

Using Synthetic Equivalences 262

Next 263**Chapter 17** Pairs Trading 264

Correlation 265

Beta 265

Notional Value and Weighted Notional Value 266

Beta-Weighted Deltas 267

Selection of Underlyings for a Pairs Trade 268

Putting the Pairs Trade Together 269

Pairs Trades Using Options 270

Deciding on the Pairs Strategy 272

Managing the Pairs Trade 273

Next 274**Chapter 18** Market Awareness 275

Broad Market Indices 275

Bond Activity 277

Volatility 277

Commodity Indices 278

Volume 278

Bellwether Stocks 278

Watching the Laggards 279

Tape Action 279

Market Breadth Indicators 279

Currency Indices 280

Conclusion 280

Next 281**Chapter 19** Wrapping It Up 282

The Edge 282

Conclusion 290

Next 290

Chapter 20 Excel Software 291

Analysis Software 291

Directory of Worksheets 292

Software Conventions 296

New Entry 296

Position Metrics 300

Inventory and Open Transactions 301

Risk Profile 302

Mid-Course Analysis 303

Pairs Trading Assistant 305

Black-Scholes Calculator 305

Calendars and Diagonals 306

Solve for Implied Volatility 307

Determine BPR 308

Key ETFs 308

Expiration Dates 309

Evaluate IV Change 310

Strategies 311

Futures 312

Retirement Planner 313

Tax Planner 314

Explore P&L Surface 315

Conclusion 318

Next 319**Appendix A** Attractive Portfolio Returns with Small Allocations 320**Appendix B** Tastytrade 322**Appendix C** Option Position Arithmetic 326**Appendix D** Investing Hardware and Software 329**Appendix E** Summary Metrics for Common Strategies 331**Appendix F** Popular ETFs 332**Appendix G** Implied Volatility Skew 335

The Put Skew 336

The Put Skew Trading Opportunity 337

Appendix H Probability Distributions 338

Continuous Random Variables 342

Probability Density for Future Stock Prices 344

Appendix I Checklist for Entering Trades 347

Liquidity 347

Implied Volatility 348

Your Assumption 349

Strategy 349

Duration 349

Expected Move and Strikes 350

Position Size 351

Portfolio Fit 351

Awareness of Binary Events 351

Evaluation Metrics 352

Price and Order Type 352

Appendix J Futures 354

Appendix K Acronyms 357

Appendix L Market Indices 360

Appendix M Buying Power Requirement 364

Cash Secured or Retirement Account 364

Margin Account 365

Portfolio Margin 366

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