If there was an opportunity to read a book and begin making money on every trade you take, you would not be able to price it high enough. A book like this does not exist (regardless of what some infomercials might say). Having said that, it is possible to pick up valuable insights from someone with years and years of experience in the markets. Mark Sebastian and Dennis Chen's book is definitely one of those.
Before we get into the book review, let us give you a little bit of our history with Mark. When the TradingPub launched in July of 2011, Mark was one of the first guest speakers we hosted. His presentation with our group was 100% trading education and 0% fluff. He gave a tremendous amount of insights to our group and we greatly appreciated that as that is the type of education we hope to provide through the TradingPub. Whenever Mark stops by the Pub he shares high quality, actionable education that benefits everyone who has the opportunity to listen to it. Mark recently wrote a book along with Dennis Chen titled "The Option Trader's Hedge Fund" and shares several of the techniques that they have used throughout bull and bear markets. Regardless of what level of trader you are, we believe this business approach to trading equity and index options will help you become a better trader!
We would especially like to thank Todd Martin for taking the time to provide this summary following his reading of "The Option Trader's Hedge Fund"
The One Man Insurance Company:
Reading Dennis Chen and Mark Sebastian’s book the The Option Trader’s Hedge Fund will allow for a better understanding of trading options by taking advantage of market volatility and managing discipline along with risk. Chen and Sebastian suggest trading options using the same model used by insurance companies when charging clients a premium to take on certain risks. They call this approach “TOMIC,” or “The One Man Insurance Company.” Similar to how insurance companies decide how much premium to charge a client by assessing risk, option traders should do the same when selling option premium.
Chen and Sebastian list several ways to manage risk in order to protect your portfolio from “shark bites.” For example, only risk two percent of your portfolio per trade and if you lose more than six percent of your portfolio in any given month, quit trading until the next month. Another risk management tool is buying “units” in case of black swan events. These units are simply very cheap options that are far out of the money with deltas below five. By allocating five percent of your portfolio to these units, you can save your portfolio or even make money if the market were to tank. Also by limiting your portfolio to only twenty percent per sector, you can protect yourself in case of industry collapses.
Trade execution and strategy are very important when trading options. Ideally you want to buy options when volatility is low, and sell options when volatility is high. Their most used strategies include vertical spreads (they use credit spreads), iron condors, ATM iron butterflies, and calendar spreads. Chen and Sebastian effectively explain these different strategies in depth and give specific examples that better clarify the concepts behind the strategy. In addition, they give helpful insight about when to enter and exit the strategies, what goals to set for them, and the ideal conditions for each.
Whether you are a beginner to trading options or you have been trading them for years, The Option Trader’s Hedge Fund is a great read for all investors. Throughout the book Chen and Sebastian successfully teach the basics of selling premium as well as more advanced analysis of measuring volatility to determine which strategies are most ideal for the current conditions. With learning some of their trading ideas, you can further adapt your trading strategies or rules allowing for better trade discipline along with a higher success rate.
The book is available at Amazon at the link below:
“Trade, Talk, Learn – Cheers to Success”
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Risk Disclaimer: Past performance is not indicative of future results. Futures trading involves substantial financial risk. Views of guest commentators do not represent those of TradingPub.com. Article intended for educational purposes only and not meant in anyway as a solicitation to buy or sell certain securities. Please consult your personal financial adviser before using this information for your own trading purposes.