Trade Options With An Edge

Trade options with an edge

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.

Top free forex white label program

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 The software comes with the book. If you have Excel you can run the software.

Trade options with an edge

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.

Trade options with an edge

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.

Using r with stock trading platforms

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:

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Chapter 1. Is This Book for You? 1
The Growth of Small Consistent Gains 2
Why Options?

Trade options with an edge

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?

Trade options with an edge

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?

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?

Trade options with an edge

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

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?

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