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Special Issue JULY 2011 MONTHLY THE OPTION TRADERS JOURNAL HIGHLIGHTS FROM Vol. 1 A SUMMATION OF ARTICLES FROM OUR INAUGURAL YEAR CONTENTS 4 Editor’s Notes MONTHLY Bill Luby THE OPTION TRADERS JOURNAL 5 Ask the Xperts The Expiring Monthly Editors EdiTOriaL 8 FEATURE: The Volatility Risk Premium in Bill Luby Commodity Options Jared Woodard Jared Woodard Mark Sebastian Mark Wolfinger 15 NEW OPTION TRADER: Risk Management Mark D Wolfinger DESIGN/LAYOUT 17 INTERVIEW: Sheldon Natenberg Lauren Woodrow Mark Sebastian CONTacT INFORMATION 20 FOLLOW THAT TRADE: VIX Minotaur Editorial comments: [email protected] Bill Luby Advertising and Sales 23 NEW OPTION TRADER: Trading Advice Expiring Monthly President from a Different Perspective Mark Sebastian: [email protected] Mark D Wolfinger Phone: 773.661.6620 25 Trading the ‘Hard Side’ The information presented in this publication does not consider Mark Sebastian your personal investment objectives or financial situation; therefore, this publication does not make personalized recommendations. 27 An Introduction to Options on Interest This information should not be construed as an offer to sell or a Rate Products solicitation to buy any security. The investment strategies or the securities may not be suitable for you. We believe the information Jared Woodard provided is reliable; however, Expiring Monthly and its affiliated personnel do not guarantee its accuracy, timeliness, or completeness. 29 Evaluating Volatility Across Asset Any and all opinions expressed in this publication are subject to Classes change without notice. In respect to the companies or securities covered in these materials, the respective person, analyst, or writer Bill Luby certifies to Expiring Monthly that the views expressed accurately reflect his or her own personal views about the subject securities and 31 INTERVIEW: Tim Andriesen issuing entities and that no part of the person’s compensation was, Mark Sebastian is, or will be related to the specific recommendations (if made) or views contained in this publication. Expiring Monthly and its affiliates, BACK PAGE their employees, directors, consultants, and/or their respective family 34 : On Eating What We Kill members may directly or indirectly hold positions in the securities Jared Woodard referenced in these materials. Options transactions involve complex tax considerations that should be carefully reviewed prior to entering into any transaction. The risk of loss in trading securities, options, futures, and forex can be substantial. Customers must consider all relevant risk factors, including their own personal financial situation, before trading. Options involve risk and are not suitable for all investors. See the options disclosure document Characteristics and Risks of Standardized Options. A copy can be downloaded at http://www. optionsclearing.com/about/publications/character-risks.jsp. Expiring Monthly does not assume any liability for any action taken based on information or advertisements presented in this publication. No part of this material is to be reproduced or distributed to others by any means without prior written permission of Expiring Monthly or its affiliates. Photocopying, including transmission by facsimile or email scan, is prohibited and subject to liability. Copyright © 2011, Expiring Monthly. www.expiringmonthly.com Special Issue JULY 2011 2 About the Expiring Monthly Team Bill Luby Mark Sebastian Bill is a private investor whose research and Mark is a professional option trader and trading interests focus on volatility, market option mentor. He graduated from Villanova sentiment, technical analysis, and ETFs. His University in 2001 with a degree in finance. work has been has been quoted in the Wall He was hired into an option trader training Street Journal, Financial Times, Barron’s program by Group 1 Trading. He spent and other publications. A contributor to two years in New York trading options on Barron’s and Minyanville, Bill also authors the American Stock Exchange before the VIX and More blog and an investment moving back to Chicago to trade SPX and newsletter from just north of San Francisco. DJX options For the next five years, he He has been trading options since 1998. traded a variety of option products successfully, both on and off the CBOE floor. His first book, Trading with the VIX, is scheduled to be published by John Wiley & Sons in 2011. In December 2008 he started working as a mentor at Sheridan Option Mentoring. Currently, Mark writes a daily blog on all things Prior to becoming a full-time investor, Bill was a business strategy option trading at Option911.com and works part time as risk consultant for two decades and advised clients across a broad manager for a hedge fund. In March 2010 he became Director of range of industries on issues such as strategy formulation, strategy Education for a new education firm OptionPit.com. implementation, and metrics. When not trading or blogging, he can often be found running, hiking, and kayaking in Northern California. Mark Wolfinger Bill has a BA from Stanford University and an MBA from Carnegie- Mark grew up in Brooklyn and holds a Mellon University. BS degree from Brooklyn College and a PhD (chemistry) from Northwestern Jared Woodard University. After working as a research Jared is the principal of Condor Options. chemist for Monsanto Company, in With over a decade of experience trading December 1976 he packed his belongings, options, equities, and futures, he publishes left a career as a research chemist behind, the Condor Options newsletter (iron and headed to Chicago to become a market condors) and associated blog. maker on the trading floor of the Chicago Board Options Exchange (CBOE). Jared has been quoted in various media outlets including The Wall Street Journal, Over the next 23 years, he worked primarily as a market maker, and Bloomberg, Financial Times Alphaville, and also held a variety of positions in the industry. The Chicago Sun-Times. After leaving the CBOE (2000), he became an options educator In 2008, he was profiled as a top options mentor in Stocks, Futures, and stresses conservative methods, as detailed in his newest book, and Options Magazine. He is also an associate member of the The Rookie’s Guide to Options. National Futures Association and registered principal of Clinamen He currently resides in Evanston IL with his life-partner, Penny. Financial Group LLC, a commodity trading advisor. Jared has master’s degrees from Fordham University and the University of Edinburgh. www.expiringmonthly.com Special Issue JULY 2011 3 Editor’s Notes Bill Luby To celebrate our first year of publication, the editors of Expiring considerations and exits for traders who are relatively new to Monthly have hand-picked some of our favorite articles and options; and delve into the details of getting good fills “trading assembled them into this special issue, with the intention of the hard side” of an order by analyzing how market makers making these selections available to a broader audience. think in various market situations. This issue highlights several subjects that have been examined In order for this special issue to closely resemble a typical from a number of different perspectives in our first year of monthly issue, we have also included two of our recur- publication. While the primary focus of Expiring Monthly is ring monthly features: some selections from our monthly on equity options, the articles in this special edition consider Ask the Xperts feature, in which the editors respond to the subject of options broadly, with several articles which reader questions; as well as a Back Page opinion piece which emphasize commodities and interest rate products, as well as debunks the idea of “eating what we kill.” one which outlines an approach for evaluating volatility across Thanks to those who have contributed many excellent guest multiple asset classes. articles over the course of the year, the staff who magically Interviews have been an essential component right from the start; produced an issue every month on the Monday following for this issue we’ve selected one interview with noted author options expiration and most of all to all our loyal readers. Sheldon Natenberg and another with Tim Andriesen, Managing With any luck, we hope to be expiring monthly for many Director of Agricultural Commodities for the CME Group. years to come! Elsewhere in this issue, we analyze the volatility risk premium Bill Luby, Contributing Editor in both equities and commodities; discuss risk management We Understand Strategy The brokers at Price Futures Group are dedi- cated to meeting the needs of our clients. We have the expertise to create customized strategies and portfolio planning encompass- ing futures, options, spreads, cash/futures, and unique fundamental analysis. PRODUCTS EXPERIE NCE SERVICE www.expiringmonthly.com Special Issue JULY 2011 4 REPRINTED FROM DEC 2010, VOL. 1, NO. 10 Ask the perts The Expiring Monthly Editors Q: When should one use an Q: I anticipate a drop of $2 not paying too much time spread over just selling the iron butterfly or iron condor in a $45 stock — within the premium and not spending desired option? The strangle instead of just a regular next 2 to 25 days. Do I go too many dollars — just in will always have a bigger butterfly or condor? for ATM, ITM, or OTM puts? case the stock surprises credit. Admittedly, you need Which expiration month? Or by shooting much higher. to define a stop, but this — Eric should I be basing decisions Probably the front or doesn’t seem to change the A: In practice there is on an analysis of the 2nd month put with a conclusion. no difference between a $50 strike. Because time Greeks? So many questions! — Vic R. condor or butterfly and What factors would you use premium is small, you are an iron butterfly or iron to guide such a choice? still okay if the drop takes A: The fact that the condor.
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