Stefan Deutschmann - Options for everybody

Figure 68: Influence of the Vega on IC and Strangle 314

Figure 69: Pro/Contra (un)defined risk-strategies 315

Figure 70: Difference in percentage premium at different VIX levels (average premium as a percentage of underlying price) 316

Figure 71: P/L Iron Condor vs. Strangle (low vs. high VIX) 317

Figure 72: Properties of different strategies 320

Figure 73: Volacrush in „BBBY“ before earnings. 328

Figure 74: Selection of the expiration cycle for an earnings trade in BBBY 329

Figure 75: VIX "mean-reverting" 2018 337

Figure 76: Example of a VXXB Trade (Vertical-Spread) 339

Figure 77: Example configuration FinViz 346

Figure 78: Results of the filter criteria at FinViz 348

Figure 79: Setup of a Ratio-Spread 351

Figure 80: P/L-Diagram Put-Ratio-Spread (1xΔ50 Long-Put; 2x Δ30 Short-Put) 352

Figure 81: Profit zone put-ratio spread (buy 1x Δ50 long put, sell 2x Δ30 short put) 353

Figure 82: Example Naked-Short-Put 363

Figure 83: Example Long Call Vertical 365

Figure 84: Example Short Put Vertical 367

Figure 85: Example Long Put Vertical 369

Figure 86: Example Naked Short Call 373

Figure 87: Example Short Call Vertical 375

Figure 88: Example Broken Wing Butterfly 378

Figure 89: Example Butterfly 381

Figure 90: Example Iron Condor 385

Figure 91: Example Iron Fly 388

Figure 92: Example Jade Lizard 390

Figure 93: Example Straddle 392

Figure 94: Example Strangle 394

A.M. Ante meridiem

AMC After Market Closing

ATM At-the-Money

Bln. Billion

BMO Before Market Opening

BTC Buying to Open

BTO Buying to Close

DTE Days till experation

ETC Exchange Traded Commodity

ETF Exchange Traded Fund

ETN Exchange Traded Note

USD USD

ITM In-the-Money

IV Implied Volatility

IVR Implied Volatility Rank

Mio. Million

OCC Options Clearing Corporation

OTM Out-of-the-Money

P.M. Post meridiem

P/L Profit/Loss

POP Potential of Profit

STC Selling to Close

STO Selling to Open

SQRT Squareroot

USD United States Dollar

A good book always begins with an honest preface. So first of all I would like to thank you for holding my first book in your hands and I hope that you will be satisfied with it in the end. What made me write this book you might ask? I myself have been trading in different approaches to the financial markets for years and, like almost everyone else, had to teach myself everything from the ground up. I didn't have a mentor and I know how frustrating it can be to have to go on this journey alone. There are many offers within the financial world that promise you great wealth or want to make you a professional in a short time. Let's not kid ourselves, 99% of it is complete nonsense and brings you nothing, except empty bags, than you had before. Books are often outdated or simply no longer up to date and seminaires are expensive pleasures that don't tell you a secret in the end.

In 2018 I therefore decided to write this book and to dedicate it to an area that seems to have been somewhat neglected in the German-speaking world. Here in Germany, hardly anyone talks about trading options. I am well aware that "the German" has no great interest in the capital markets, especially not in equities. Often it stays with the savings book - that will have to do. So if the interest in equities is already so low, one can guess that the interest in options must be much lower. Wrongly, I think. Options are a great financial product which, if used correctly, can achieve a clear excess return over simple stock shares. In Germany it is a niche issue. The literature that has appeared in Germany has unfortunately become somewhat outdated, sometimes simply bad and often completely overpriced, or simply not practicable or suitable for the small private investor. Exactly this aspect I would like to try to change.

The intention is therefore to generate as much interest as possible in this subject area and to get more people interested in options.

What is this book and what it isn't? Will this book make you a millionaire? Certainly not, it takes a lot more than just reading a few lines. There has to be so much honesty. Nevertheless, it should help you to provide a well-founded and wide-ranging insight into the world of options. It is essential that you always remain curious and interested. A single book cannot teach everything there is to teach and to know about this specific topic. Not even 1.000 pages would be enough. However, care has been taken to ensure that everything is addressed that you need in order to set up your first trades and to obtain your first experiences of success. However, it is still a non-fiction “entertaining” book, so you will probably not be able to read it like a novel in one piece.

In my opinion, a friendly relationship paired with a bit of humour and numerous examples is more suitable for learning than hours of frontal teaching. I try to live up to this claim here. I, too, was a bloody beginner and know your situation, so you will not be addressed from above, but directly and personally. The ultimate goal must be for you to understand what you have read and to be able to apply it! No one will be helped if you end up depressed and peppering this book in the corner instead of seriously dealing with the future.

It is very difficult to construct such a book conceptually suitable for everyone, since the knowledge to be conveyed seems to be almost infinite. However, the attempt was made to create a logical structure that would first teach you the basics and then later deal with real examples and strategies that you could put into practice. Once again, it is a reference book, so there will be parts that will bore you or perhaps even overwhelm you in the beginning (keyword "the Greeks"). Don't worry about it, it's all the same to everyone, no master has fallen from heaven yet.

The first chapters are theory-based and are intended to give you an understanding of the basic concepts of option trading. The greatest care is taken to convey this knowledge in a simple and practical way, although there are some topics that you simply have to go through. At the end of each section you will receive the most important information in a nutshell after the small hint "Remember". As soon as the strategies and trading approaches are discussed later, you can fall back on the cheat sheets and checklists towards the end of the book, print them out and stick them next to your screen.

Now I wish you lots of fun and good luck with your first steps into the world of options.

Happy Trading,

Stefan.

At this point you don't have to understand exactly what I will tell you in the following lines. If you've never been exposed to options in your life, it's no big deal. Actually, it might even be an advantage if you haven't had any points of contact yet. But before we even talk about options, I'd like to talk about how casinos and insurance companies make money. Now you're probably thinking, "Wait a second, casinos and insurance companies? What do I care? I'm here to make money." Just listen to me for a moment, after the example, you'll understand a little better what it's all about - promised.

That's how casinos make money. It's absolutely simple and you probably already knew it, but they make money with small theoretical probability imbalances in each of the hundreds of games of chance. Simply put, if you know that the probability of a coin toss falling head or tail is 50%, the casino could pay you 10 USD if the coin lands on head, but 11 USD if it lands on tail. Either the casinos set the games so that the odds are in their favor or they either pay out a sum based on the odds of an event.