As a professional.
Words like that carry a strong connotation with them.
I know what you are thinking, I’m not a professional, I am just trying to keep my head above water when I trade options.
Don’t fear, “as a professional” may be written on the cover of James Bittman’s Trading Options as a Professional, but it is a perfect read no matter which level of options trading you are at.
As an options trader, you must continue to learn and perfect the various topics of options trading. Once mastered you will be able to trade long or short, master the Greeks of your positions and portfolio, understand implied and realized volatility, and manage position risk.
Trading Options as a Professional, not only gives you an excellent initial interpretation of these topics but delivers a clear understanding of what you need to know and how to use it to make you a better trader, professional or not.
Who is the author James Bittman, why does this book succeed where so many others have failed, and where does book fail – all questions we will answer.
About James Bittman
James Bittman began his options trading career in 1980. His position at the time was equity market maker at the Chicago Board Options Exchange. Until 1993, Bittman traded options on financial futures and agricultural futures as a Commodity Options Members of the Chicago Board of Trade.
James Bittman, has since, moved to Director of Program Development and a Senior Instructor for The Options Institute at the Chicago Board Options Exchange. Bittman has stayed busy, authoring four books in total; Options Trading as a Professional, Options for the Stock Investor, Trading Index Options, and Trading and Hedging with Agricultural Futures and Options.
When he wasn’t trading or writing books, he was busy teaching the Masters’ Level Financial Markets and Trading Program at The Illinois Institute of Technology.
In the introduction, Bittman gives you everything you are going to learn in throughout the book. That list is as follows:
• Option market fundamentals
• Option price behavior, including the Greeks
• Synthetic relationships
• Pricing arbitrage strategies
• Delta-neutral trading
• Setting bid and ask prices
• Managing position risk
When you first read through the list, you will immediately think the list is only geared towards professionals, especially with topics such as synthetics, pricing arbitrage strategies, and setting bid and ask prices.
Admittedly, some of these topics are more geared towards the professional options traders. That isn’t to say they are not useful, and time should be spent reading through them. “An investment in knowledge always pays the best interest,” Benjamin Franklin.
We want to highlight three of those chapters which shine in this book and make it a worthwhile read: option market fundamentals, option price behavior, including the Greeks, and volatility.
Option market fundamentals are building block one. You may be past the basics in your trading, but a quick review of these definitions will enlighten you on aspects you didn’t even know.
One chapter I enjoy, Chapter 3: The Basics of Option Price Behavior, begins to lay the framework for the insurance analogy.
The insurance analogy compares option trading, long or short, to buying and selling insurance. You can see the similarities between the two quite quickly. Options are contracts, much like an insurance contract, which trade for a premium.
Put options paint the most natural picture. If you are long the underlying and need protection from the downside, you purchase a put. A put option will increase in value as the underlying asset decreases.
Call options might seem counterintuitive to our insurance analogy. Nevertheless, calls insure against a market rally.
A call will insure cash against missing a market rally.
The reason we care about this analogy is that it will help you paint a picture of how options are priced and traded in the real market. Insurance companies are notorious for being good at assessing risk and calculating the premium.
This book does the best job that we’ve seen, of setting up the analogy and walking you through it the entire step of the way.
Where this book shines, and why you need to read it, is because of its explanation of the Greeks. By now you’ve seen many explanations about delta, gamma, vega, theta, and rho, including our own definitive guides.
Trading Options As A Professional breaks the Greeks down to their most basic form. First, it builds the scene with a comprehensive definition of each Greek filled with examples to put them into the perspective of actual trading.
Once you have a basic understanding for each of the Greeks, the book will continue to build on that knowledge by breaking each one down to their moving parts.
Knowing how delta moves with time to expiration and changes in volatility, how Vega changes based on the strike price, or when Rho comes into play are valuable, vital bits of information that you should know as an options trader.
The chapter on volatility will bring you a good overview of the different types of option volatility; historical volatility, implied volatility, and expected volatility. The section on volatility won’t take you through the advanced concepts that volatility can offer, but a general overview will be given.
Some of the things we like that James Bittman touches on is the difference between calendar days and trading days for use in volatility formulas, such as those for expected volatility.
He does an excellent job of describing how volatility is used when making actual option trades. This is done by discussing how an option can be “overvalued” or “undervalued” based on the implied volatility assumption.
This book does give you a brief definition of volatility skew. Unfortunately, the explanation is kept very basic, and he doesn’t get into more detail about how it can be advantageous to your trading.
Where Does This Book Fall Short
We may sing the praises of this book, but like most informational books, it does fall short in a few key areas.
The information in this book is presented with no particular audience in mind. The title addresses the professional, but the information ranges from the basic to the more advanced options trader.
There are some chapters in here meant for professionals. That was the purpose of the book, but it will be hard reading for nonprofessionals. The chapters on synthetic relationships in options and arbitrage opportunities make for interesting reading but are not practical for a retail trader. Due to commissions, bid/ask spreads, and slow execution, it is rare for a retail trader to have the ability to take advantage of any arbitrage opportunities.
Even though there are a few shortcomings throughout this book, the overall content was very informative. We’ve seen this book display a better understanding for most option concepts when compared to other works we have read.
You are not going to see any profit and loss graphs or trading strategies in this book. Instead, you are going to get a detailed explanation of the interworkings of options. The knowledge you gain in this book will make you a better options trader.