Trading Options for Edge, My Summary & Book Review

Trading Options for Edge: by Mark Sebastian

My Short Summary & Book Review

Trading Options for Edge by Mark Sebastian is a guide for more experienced options traders looking to refine their strategies and trade like professional firms. The book focuses on trading spreads and then finding and capturing "edge" through timing, volatility, hedging, and then using the Greeks under varying market conditions.

This book is not a beginner’s option trading book, so I would recommend reading either Sheldon Natenberg’s Option Volatility & Pricing or Larry McMillan’s Options As A Strategic Investment. Those are probably the two best mid-level options trading books.

Trading Options For Edge seems to have much more focus on Volatility and the Greeks than Sebastian’s first book The Options Trader’s Hedge Fund (which is one of my all-time favorite options books).

Volatility Zones

A new topic discussed in this book that I haven’t seen in other books is the Volatility Zones. Sebastian gives examples of where historical and implied volatility are at in relationship to each other and relationship to historical levels for a given stock or index. He looks for edge when volatility is one of the 4 “zones” of historical levels, and then applies specific trades depending on that zone and future outlook.

“The first key to understanding edge is to understand the movement in the underlying.

Volatility is mean-reverting, not just in how it trades in the long term, but how it trades in the near term. Thus, while long term vol has its mean, current volatility also has levels it will trade within in the near term. The near term can be one week, one month, or one year. In order to simplify the process of understanding where volatility is in the near term, I have broken up the levels of current volatility into four main zones. Each zone represents a general level of realized volatility (RV) for the overall market for any individual stock. Zone 1 represents low realized volatility, zone 2 represents low volatility, zone 3 is long-term mean volatility (remember that long term means tend to be higher than a normal VIX level, because while the VIX can go super high, it has never settled below 8) to elevated volatility, and zone 4 is high volatility.

Each zone has its own characteristics and tendencies. Traders must understand each zone, and the signs that the market is moving from one zone to another.”~ Mark Sebastian, Trading Options For Edge

Trading Options for Edge

A professional guide to volatility trading that reveals advanced strategies used by institutional traders. Master the art of reading market volatility, timing entries and exits, and developing a systematic edge in options markets through proven techniques and professional-grade analysis.

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Trading Options for Edge: A Professional Guide to Volatility Trading

Spreads

Most of the book is focused on trading spreads.

Iron Condors
Strangles
Butterflies
Front & Back Spreads
Calendar Spreads

Each spread has it’s own chapter dedicated to putting on trades with those spreads. Sebastian explains when is the best time to put the various spreads on by taking account of the historical volatility and the implied volatility. He gives other tips for trading each spread and talks about what to look for in the volatility skew to gain the most edge on the spread.

He includes profit targets and adjusting strategies for these spreads as well:

“The following list shows what we do at Option Pit for short call and put spreads:

Set profit target at 50% of the credit or less.

If the spread makes half the profit target in the first day or two, get out.

Set loss at the profit target.

If you adjust the spread, the original margin is still where the maximum loss should be set.

Add to the trade, but do so at different strikes; never average down.

If conditions change or the assumptions change, get out.

~ Mark Sebastian, Trading Options For Edge

My Thoughts on Trading Options For Edge

Besides spreads trading there are a few other really helpful topics this book goes over, including portfolio greeks, trading the Vix, and understanding how market makers trade. I would probably recommend Mark Sebastian’s first book, The Option Trader’s Hedge Fund, over this book, but this is still a great book for anyone serious about options trading. It’s a short book and gets right to the point. The topics are somewhere between intermediate and advanced, so it’s not a new trader’s book, but it’s worth keeping a hard copy handy if you want to brush up on some volatility spread trading.

If you've made it this far, I'd really recommend checking out my book summary and review of The Unlucky Investor's Guide To Options Trading, by Julia Spina of TastyTrade. This book gives a unique look at actual options trade setups and Julia gives statistical data to backup her precise trade plan. It's a great, easy to read options trading book that I would put on my list of all-time best options trading books.