Trading Options As A Professional, by James Bittman
My Book Review & Summary
I’ve been wanting to read this book for awhile and finally got to it. It wasn’t until about 50 pages in that this book really got going, specifically The Greeks chapter.
Bittman does use a decent amount of technical math and equations in this book but he does a great job making them easy to understand so you don’t need to spend too much time trying to understand the calculations. Some topics get pretty advanced, but they remain pretty easy to follow.
There are quite a bit of topics on market-making. Trading Options as a Professional could be seen as an options market-making book. Bittman gives an interesting look at how the options markets are really made and how these dealers are getting in and out of positions with their hedges in place.
The Greeks
This chapter did such an amazing job at clearly explaining the option Greeks in a way that made so much sense without over explaining. The example I’ll use here is specifically for Delta.
How Delta Changes
Bittman gives 5 rules for how delta changes:
- Deltas & Stock Price: Deltas of both calls and puts increases as the stock price rises and decrease as the stock price falls (puts move up from -1.00 to 0.
- Deltas & Strike Price: In-the-money options have deltas with absolute values greater than +0.50. At-the-money options have deltas with absolute values of approximately +0.50., and out-of-the-money options have deltas with absolute values less than +0.50 regardless of time to expiration.
- Deltas & Time to Expiration: The absolute values of deltas of in-the-money options increase toward +1.00 as expiration approaches. The absolute values of deltas of out-of-the-money options decrease toward zero as expiration approaches.
- Deltas of Calls & Puts with the Same Strike: The fourth rule on deltas is that the sum of the absolute values of the call delta and the put delta is approximately +1.00. With the stock at 100 at 56 days to expiration, for example, the delta of the 100 Call is +0.55, and the delta of the 100 Put is -0.45. The sum of the absolute values of these numbers, +0.55 and +0.45, is +1.00.
- Deltas & Volatility: As volatility increases, the absolute value of a delta changes toward +0.50. In other words, deltas of out-of-the-money options increase, and deltas of in-the-money options decrease.
Synthetic Relationships & Arbitrage
Before learning about arbitrage strategies you’ll first need to have an understanding of synthetic relationships. This section of the book teaches the synthetic relationships and then how to use them to master arbitrage strategies. The put-call parity is also a topic that is taught very well in this section of the book.
This table shows the algebraic equation for the put-call parity that starts with Long Stock = Long Call + Short Put.
“There are six real positions — long and short stock, long and short call, and long and short put. Corresponding to these real positions are six synthetic positions, each of which consists of positions in the other two instruments. The basic put-call parity equation is "+ Call - put = + stock" or, in words, "Long call plus short put equals long stock," assuming that the call and put have the same underlying, the same strike price, and the same expiration date. The five other synthetic relationships logically follow from this basic equation.
Whether a stock price lands above, below, or at the strike price at expiration, a synthetic position results in the same position as a real position, with the same profit or loss, and with the same effective price as a real position.
If the interest rate is zero and there are no dividends, then the time value of calls and puts in synthetic positions would be equal. In the real world, however, the relationship of the time values depends on the relationship of the interest rate and dividends. Theoretically, investors should be indifferent between trading real positions and synthetic positions, but factors such as transaction cost and bid-ask spreads affect which types of positions traders actually choose.”~ James Bittman, Trading Options as a Professional
Trading Options as a Professional
Master advanced options trading strategies used by market makers and institutional traders. This comprehensive guide reveals professional techniques for managing risk, pricing options, and generating consistent profits in volatile markets. Essential reading for serious options traders looking to elevate their game.
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Market Making
Trading Options as a Professional also covers market making topics such as setting bid-ask prices and how they attempt to maintain a delta neutral book.
Market makers attempt to buy on the bid and sell on the ask. But this two part process doesn’t happen at the same time. So once the first part is finished (buying on the bid), the trader would then need to sell stock to balance out their current delta. They hold this stock as a hedge until they are finally able to sell the option back on the ask side of the spread, while also then buying back the stock to flatten out the position.
“Speculators who engage in delta-neutral trading strategies hope to profit from predicted changes in implied and realized volatility. They risk losing money if their forecasts are wrong. For market makers, a delta-neutral position does not involve a forecast. It is a hedge, or risk-reducing tactic, until they make "step two" of a trade.”~ James Bittman, Trading Options as a Professional
My Take on Trading Options as a Professional
This book covers a lot of topics that revolve around market-making and arbitrage strategies. It’s more of an advanced book but it doesn’t use much technical math and it’s more useful for a trader than just the theory behind the trades. This book will be on my all-time best options trading book list, and it’s one that I will come back and reread at some point.
If you’ve made it this far, I’d recommend checking out another one of my favorite options trading books, Positional Options Trading, by Euan Sinclair. It’s another advanced trading book, but it’s Sinclair’s best book for actual trading, in my opinion.
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