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Option Trader's Hedge Fund, The: A Business Framework for Trading Equity and Index Options
In this book, a hedge fund manager and an option trading coach show you how to earn steady, reliable income selling options by managing your option trades and running your option portfolio as a real business with consistent, steady returns. Packed with real-world examples, the authors show you how to manage your own “one man” hedge fund and make consistent profits from selling options by applying the basic framework and fundamental business model and principles of an “insurance company”. This framework helps you to apply your option trading strategy to a solid, predictable, business model with consistent returns. For someone who has some knowledge of trading options and wants to become a consistent income earner. The authors provide a complete “operations manual” for setting up your business. Gain pearls of wisdom from both a professional options trader and coach, and from a hedge fund manager focused on managing an options based portfolio.
- GenresFinanceNonfiction
297 pages, Kindle Edition
First published May 18, 2012
142 people are currently reading
396 people want to read
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Displaying 1 - 20 of 20 reviews
May 23, 2023
As already noted by a few reviews, the book is very chaotic (from have a quiet place to trade with backup internet connection to "here's what the author wrote in a blog post on specific date about SPX setup"). I don't like this, but never the less, it has very useful ideas for intermediate to advanced option players.
I particularly liked this part:
The Card Game Value
One of the most loved trades by the retail public is the “credit spread.” One of the biggest mistakes the retail public makes is failing to exit credit spreads when the short option becomes inexpensive. This is not because they want to hold the trade to expiration. It is because most do not understand that there is a second component in the value of options that most option pricing models cannot calculate. This component will cause the final portion of the value of an option to take much longer to decay than the model predicts. This value exists because of the payout disparity if the option goes sour (unit risk). This is The Card Game Value.
Understanding this allows you to exit trades at an earlier date and move money into trades that follow the standard option model.
The Card Game: Two men are going to play a card game; they will play it only once. There are 100 cards. Ninety-nine of the cards have a value of 0 and one card has a value of 1,000. One of the men will pay the other for the chance to draw one card. If he draws the 0, he gets nothing; if he draws the 1,000, the other man must pay him $1,000. Theoretically, the card game is worth $10 (1,000×1/100). But what do you think the one man should charge the other to play the game? If this game were played over and over, the man would probably charge a very low number, say $11. He would know that over time probabilities are in his favor and he will come out ahead (this is how Las Vegas pays for all those nice hotels). However, this game will be played only once. The odds are the same, but if the $1000 card is drawn, the man on the hook will have no opportunity to make the money back. My guess is that it would take a lot more than $11 to get someone to play this game.
This thought process is exactly what throws off the value of cheap options. The probabilities say that the option should be worth nothing, but the option will maintain a value of .10 to .25 for an exceptionally long time. That is because the person who sells the cheap option is the same as the man who is selling the draw in our card game. The person would make money over time in a Vegas world, but option months have a limited life. If the seller of the cheap option has the trade go bad, he will never see that money again. The trader will not have an unlimited number of chances to play this game. The major move has happened; the trader has lost. To make matters worse, unlike in the card game, the trader has an undefined risk, meaning that he has no idea how much he will lose if the trade goes against him.
The final 0.25 of an option takes much longer to decay out. What does this mean to you as a credit spread trader? Take off credit spreads when they no longer follow the model and only have Card Game Value. This improves your performance because you free up capital earlier to move into other trades, which pricing models and Greeks can value, and can be out of your trades earlier (always a good thing). Credit spreads are a great way to make money, but it takes only one bad draw to wipe you out. Don’t get caught playing cards.
I particularly liked this part:
The Card Game Value
One of the most loved trades by the retail public is the “credit spread.” One of the biggest mistakes the retail public makes is failing to exit credit spreads when the short option becomes inexpensive. This is not because they want to hold the trade to expiration. It is because most do not understand that there is a second component in the value of options that most option pricing models cannot calculate. This component will cause the final portion of the value of an option to take much longer to decay than the model predicts. This value exists because of the payout disparity if the option goes sour (unit risk). This is The Card Game Value.
Understanding this allows you to exit trades at an earlier date and move money into trades that follow the standard option model.
The Card Game: Two men are going to play a card game; they will play it only once. There are 100 cards. Ninety-nine of the cards have a value of 0 and one card has a value of 1,000. One of the men will pay the other for the chance to draw one card. If he draws the 0, he gets nothing; if he draws the 1,000, the other man must pay him $1,000. Theoretically, the card game is worth $10 (1,000×1/100). But what do you think the one man should charge the other to play the game? If this game were played over and over, the man would probably charge a very low number, say $11. He would know that over time probabilities are in his favor and he will come out ahead (this is how Las Vegas pays for all those nice hotels). However, this game will be played only once. The odds are the same, but if the $1000 card is drawn, the man on the hook will have no opportunity to make the money back. My guess is that it would take a lot more than $11 to get someone to play this game.
This thought process is exactly what throws off the value of cheap options. The probabilities say that the option should be worth nothing, but the option will maintain a value of .10 to .25 for an exceptionally long time. That is because the person who sells the cheap option is the same as the man who is selling the draw in our card game. The person would make money over time in a Vegas world, but option months have a limited life. If the seller of the cheap option has the trade go bad, he will never see that money again. The trader will not have an unlimited number of chances to play this game. The major move has happened; the trader has lost. To make matters worse, unlike in the card game, the trader has an undefined risk, meaning that he has no idea how much he will lose if the trade goes against him.
The final 0.25 of an option takes much longer to decay out. What does this mean to you as a credit spread trader? Take off credit spreads when they no longer follow the model and only have Card Game Value. This improves your performance because you free up capital earlier to move into other trades, which pricing models and Greeks can value, and can be out of your trades earlier (always a good thing). Credit spreads are a great way to make money, but it takes only one bad draw to wipe you out. Don’t get caught playing cards.
February 26, 2022
Some valuable advice here and there but mostly inconsistent: the book content violently swings from trivial (e.g., get yourself a quiet room where to work) to impenetrable if you haven't read basic and intermediate books about options trading.
Incomprehensible where it matters unless you have read and fully understood "Option Volatility & Pricing" by Natenberg.
Regardless, the content is not particularly well written, and it's pretty dated in some aspects, with scenarios over ten years old. The foundations of options trading have not changed, but the breath of trading strategies has.
---
How I review books
5 stars - an exceptional book that expands my reasoning, not just my knowledge
4 stars - a great book that significantly expands my knowledge
3 stars - a book with some interesting information and some major flaws that didn't really make an impact in my life.
(Notice that there's a time in life for certain books. It's possible that this was not the time for this book, and the review rating would change ten years from now)
2 stars - a book that gave me nothing and took my time.
1 star - a book so poorly written that I couldn't even finish reading.
Incomprehensible where it matters unless you have read and fully understood "Option Volatility & Pricing" by Natenberg.
Regardless, the content is not particularly well written, and it's pretty dated in some aspects, with scenarios over ten years old. The foundations of options trading have not changed, but the breath of trading strategies has.
---
How I review books
5 stars - an exceptional book that expands my reasoning, not just my knowledge
4 stars - a great book that significantly expands my knowledge
3 stars - a book with some interesting information and some major flaws that didn't really make an impact in my life.
(Notice that there's a time in life for certain books. It's possible that this was not the time for this book, and the review rating would change ten years from now)
2 stars - a book that gave me nothing and took my time.
1 star - a book so poorly written that I couldn't even finish reading.
February 12, 2022
To get all the juice from this book, you need to be at least intermediate level to understand the different strategies they taught. The reason is very simple, in just a couple of chapters. The authors started to explain different types of hedging, and they skipped some basic things a regular options trader should know. One of the most insightful things about this book is the way they present the business, started an insurance company. I know, we all know about the insurance business (selling options to get the premium), but this is more complex, and there is so much depth in this book regarding the way we placed a trade. What I mean is simple, understanding volatility is what differentiates a regular trader from a great one.
Read this book if you are passionate about options trading. It is worth the time.
Read this book if you are passionate about options trading. It is worth the time.
August 31, 2023
I wanted to like this book because it provides a valuable framework and guidelines on how to go about making consistent returns selling options.
As other reviews have stated, the first part is instructive and clear, if occasionally repetitive – it reiterates that trading requires a plan, discipline, rules etc. –
By chapter 9, the authors evidently ran out of time and scrambled to get the book published. This is where the train-wreck unfolds.
The text becomes erratic, sloppy and -worst of all- riddled with easy verifiable mistakes (I’m using Chat GPT to fact check, which btw isn’t always factually accurate on this topic either) .
Definitions are inconsistent or not provided at all. Terminology is used imprecisely and often mixed with trader jargon incomprehensible to the non-professional.
Sadly, for anyone interested in option trading this book is still a must since there aren’t many books of its kind, especially chapters 1 to 7. However, it’s impossible to give it a favorable review as it was published prematurely and written in the manner of an undergraduate all-nighter before deadline.
As other reviews have stated, the first part is instructive and clear, if occasionally repetitive – it reiterates that trading requires a plan, discipline, rules etc. –
By chapter 9, the authors evidently ran out of time and scrambled to get the book published. This is where the train-wreck unfolds.
The text becomes erratic, sloppy and -worst of all- riddled with easy verifiable mistakes (I’m using Chat GPT to fact check, which btw isn’t always factually accurate on this topic either) .
Definitions are inconsistent or not provided at all. Terminology is used imprecisely and often mixed with trader jargon incomprehensible to the non-professional.
Sadly, for anyone interested in option trading this book is still a must since there aren’t many books of its kind, especially chapters 1 to 7. However, it’s impossible to give it a favorable review as it was published prematurely and written in the manner of an undergraduate all-nighter before deadline.
December 10, 2021
Great specific information! Starts off very well!
Provides very valuable information around how someone can trade options for a living specially how to be consistent about making money through options. Starts off great and gives great details on the setup etc. it feels like it goes into some complex strategies too quickly and doesn’t setup some key fundamentals for those. I would have loved a chapter where key fundamentals, specially Greeks and what they mean were summarized. Even a 1 pager on those would help general traders get a lot of the content more quickly. I had to go through Google several times to grasp some concepts but overall a great read and definitely will be coming back to this as a reference throughout my trading career.
Provides very valuable information around how someone can trade options for a living specially how to be consistent about making money through options. Starts off great and gives great details on the setup etc. it feels like it goes into some complex strategies too quickly and doesn’t setup some key fundamentals for those. I would have loved a chapter where key fundamentals, specially Greeks and what they mean were summarized. Even a 1 pager on those would help general traders get a lot of the content more quickly. I had to go through Google several times to grasp some concepts but overall a great read and definitely will be coming back to this as a reference throughout my trading career.
May 14, 2018
This book is well written and quite clear in the guidance and strategies it wants to convey. Thus it avoids the typical pitfalls of other books in this space. I would not recommend this to beginners and those who want to explore if investing in options is right for them. You need some experience in having made and lost some money in options for you to be ready for this book. Chen and Sebastian are also institutional floor Traders and this book is also talks more about learnings from the perspective of the floor rather than an individual retail part time trader.
March 18, 2021
TOMIC Rocks!
I bought his book to learn more about options trading but it is much more than that. It is a complete walkthrough from beginning to master trade options with a consistent profit.
A first part of the book it is about how to set a trading operation like an insurance company (selling options instead of just buying it). The book is worth just for that.
The second part are articles related to advanced options trading. Some of the strategies I’ve never heard of before.
Much worth the reading!
I bought his book to learn more about options trading but it is much more than that. It is a complete walkthrough from beginning to master trade options with a consistent profit.
A first part of the book it is about how to set a trading operation like an insurance company (selling options instead of just buying it). The book is worth just for that.
The second part are articles related to advanced options trading. Some of the strategies I’ve never heard of before.
Much worth the reading!
December 6, 2021
1. It describes a business model (TOMIC) around stock market which can be managed by an individual where the individual is manager, trader, planner.
2. Beautifully describes risk management and scalability of the business
3. A good part is dedicated to VIX i.e. volatility, options strategies etc.
4. It compares the hedge fund business model with an insurance business and how we can scale it up slowly.
2. Beautifully describes risk management and scalability of the business
3. A good part is dedicated to VIX i.e. volatility, options strategies etc.
4. It compares the hedge fund business model with an insurance business and how we can scale it up slowly.
March 17, 2022
It contains some valuable information, but some topics are better covered than others, and as many other reviewers already mentioned, it lacks practical examples.
A clear example with one section: Using Skew
Just one page of content, with no practical explanation whatsoever about how to take advantage of it. I had to complete my learning using other sources.
I liked the trading journal, and the other templates.
A clear example with one section: Using Skew
Just one page of content, with no practical explanation whatsoever about how to take advantage of it. I had to complete my learning using other sources.
I liked the trading journal, and the other templates.
September 15, 2023
This book came highly recommended and I don’t really see what the fuss is about. The first chapters, where trading options is compared to selling insurance, were not very enlightening or (frankly) any use to me. There is a pretty good chapter on some of the common option strategies, but apart from that the whole book is a bit of a wet sandwich. Wouldn’t recommend.
November 1, 2024
More on volatility trading than business framework
I was looking more for a book on the business framework of trading options. And while it had some that, the book was more an advanced course on volatility trading options. I did distill some nuggets on businesses framework that did make the book worth the investment.
I was looking more for a book on the business framework of trading options. And while it had some that, the book was more an advanced course on volatility trading options. I did distill some nuggets on businesses framework that did make the book worth the investment.
November 10, 2024
For people already trading who want to structure their activity
High quality book with well written examples of trades. However, it’s addressed rather to intermediate/advanced traders who feel the need to improve the structure of their trading activities. The One Man Insurance Company framework might be exactly what they need.
High quality book with well written examples of trades. However, it’s addressed rather to intermediate/advanced traders who feel the need to improve the structure of their trading activities. The One Man Insurance Company framework might be exactly what they need.
May 31, 2020
Very good, a warning it gets real advanced really fast about halfway through. Even if you don’t understand everything in latter half of the book, come back to it every 6 months and you’ll understand more each time.
April 24, 2018
My first book on options. Learned about some strategies. Book doesn't give all details though, need to check internet for basic info.
June 22, 2019
Really great overview of options and where to continue your education and reading.
March 26, 2021
Not necessarily the beginner's book but an important book. I will need a few more re-reads to grasp all concepts.
June 4, 2023
Excellent book. Will keep it on my office desk.
May 3, 2025
Probably very useful for someone who wants to trade options professionally or very actively, focusing on volatility and its impacts
Read
February 15, 2016Looking for more strategies outside of theda positive.
May 21, 2024
Perfect for me as beginner to get going. Revisit in 3-5 years as my knowledge gets better
Practical trade ideas too. Some too difficult for my understanding now but def useful
Practical trade ideas too. Some too difficult for my understanding now but def useful
This entire review has been hidden because of spoilers.
Displaying 1 - 20 of 20 reviews