The Option Trader's Hedge Fund PDF

The Option Trader’s Hedge Fund PDF

The Option Trader’s Hedge Fund PDF (A Business Framework for Trading Equity and Index Options) 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.

Category: Options

Author: Dennis A. Chen, Mark Sebastian 

Language: English

Free download link: At the end of the post


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.



As Director of Research and Co-Portfolio Manager of Jim Cramer’s Charitable Trust, I continuously look for more effective ways to oversee the fund and improve returns. Although it is a long-only equity fund, it is imperative to have a working knowledge of all asset classes and their effects on the broader market and trading psychology. One of the most impactful metrics of managing money in today’s market is, without question, volatility.

Volatility as an asset class is a rapidly growing concept in the marketplace. Indexes and products have been introduced to trade, hedge, and use as forecasting mechanisms.

Financial media commonly portrays the VIX, or CBOE Volatility Index, as an indication of “fear” in the market. Typically, when the VIX is trading higher, stocks are moving lower and the inverse applies. Yet it is far more important than that, as the VIX and volatility-based products have brought the market to its next stage of evolution.

The Chicago Board Options Exchange began its academic work on the VIX in the early 1990s. Today’s index has evolved into a product with futures and options contracts based on the S&P 500, which allows for a more accurate view of investors’ expectations on future market volatility. Following the financial meltdown in the back half of 2008, implied volatility exploded as the market imploded, and that is when market participants embraced volatility as a diversification tool. Other
exchanges have now developed their own futures and derivatives products across multiple asset classes and commodities, including currency, gold, and oil.

Mark Sebastian is truly a master of trading options and futures on volatility derivatives. When it comes to the technical subtleties of complicated markets, his analysis and ability to break down the mathematical and quantitative complexities in an intelligent and understandable style is second to none. Mark forces you to think in different ways about the option and futures markets, often in ways that are outside the comfort zone.

For this book, Mark joined forces with his friend Dennis Chen and convinced him to share the framework and processes used when managing his hedge fund. By doing so, they provide you with a real-world perspective to the business of trading options.

Albert Einstein said, “Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius—and a lot of courage—to move in the opposite direction.” Mark and Dennis’s uncanny way to consistently come up with out-of-the-box strategies encourages traders to dig deep and really understand the world of derivative-based products. From my perspective, Mark and Dennis’s ideas, strategies, framework, and concepts are sophisticated yet easy to understand and implement, which is invaluable when trying to beat the competition and the broader averages.

The Options Trader’s Hedge Fund is a unique tool that carefully explains how traders can effectively identify and manage positions like the top volatility experts do using key strategies in trend, time, and volatility. As unique as its authors, it encourages investors to embrace their individuality when developing a trading plan and discipline for trading options.

A captivating and masterful read, The Options Trader’s Hedge Fund is a must-have guide that every professional trader should have in his or her library. The biggest takeaways center on methodology, risk control, and effective use of capital—the cornerstones for successful money management and trading.

Trade well,
Stephanie Link
Director of Research, Co-Portfolio Manager, & VP of Strategy
The Street

Table of Contents- The Option Trader’s Hedge Fund PDF

Introduction  1
Endnote   3

Part I The Framework
Chapter 1 The insurance Business   5
How Insurance Companies Make Money  8
How Insurance Companies Lose Money  12
Success Drivers of the Insurance Business   14
Chapter 2 Trade selection  19
Market Selection  20
Strategy Selection  27
Time Frame. 28
Volatility   29
Pricing  29
Endnote  30
Chapter 3 risk management  31
Risk Management  32
Money Management  33
Position Sizing  34
Portfolio Diversification  35
Adjusting the Different Trades  36
Addressable Risks  37
Insuring the Portfolio Against Black Swan Events  38
Chapter 4 Trade execution  43
Conditions of the Market   43
Evaluate Potential Realized Volatility   44
Evaluate Implied Volatility   44
Evaluate the Months  46
Evaluate the Skew   47
Evaluate Other Products  47
Trade  48
Order Entry  49

Chapter 5 The Trading plan   55
The Mind-Set  56
The Importance of Sticking to the Process  58
Questions Your Trading Plan Should Answer  60
Endnotes  62
Chapter 6 Trading infrastructure   63
Risk Capital   63
The Trading Platform (Broker)  65
Portfolio Margin   67
Information Resources and Other Analytical Tools  69
Dedicated Space  70
Backup Plans  70
Chapter 7 Learning processes  73
The Trading Journal   73
Sounding Board   77
Endnote   80

Part II Implementing the Business
Chapter 8 understanding Volatility   81
What Causes Volatility?   81
Three-Dimensional   83
Volatility and the Model   88
Chapter 9 most used strategies  89
The Vertical Spread   89
The Iron Condor   93
The ATM Iron Butterfly   100
The Calendar Spread or Time Spread   108
The Ratio Back and Front Spread  115
Endnote   119
Chapter 10 Operating the Business: putting Together TOmiC 1.0 from A to Z  121
Trading Plan   122
Executing the Trading Plan  126

Part III Lessons from the Trading Floor
Chapter 11 Lessons from the Trading Floor on Volatility   131
Understanding Weighted Vegas in SPX Index Options   131
Taking on the Skew  134
Four Tips When the VIX Cash Is Depressed   135
How to Find and Track Volatility Skew.  137
SPX Skew: It’s All Relative   137
Understanding Implied Volatility in Iron Condors  138
The Stages of Skew  140
Chapter 12 Lessons from the Trading Floor on risk management  145
Cash Is a Position  145
The Card Game Value   146
Why Are Option Trading Hands So Hard to Sit On?  147
How Option Time Value Premium Decays over the Weekend  149
When Is the Time to De-risk Your Portfolio?  152
How to Trade When You Go on Vacation  152
Chapter 13 Lessons from the Trading Floor on Trading and execution  155
What Everybody Should Know About Payment for Order Flow     155
When Should You Worry About Assignment?    157
A Successful Short SPX Calendar  161
Butterfly Trading Checklist   163
What Is the Proper Width for an Index Butterfly’s Wings?  165
The Importance of Good Exits  168
Preparing to Trade for a Living, How Much Capital Is Needed?   169
The Importance of Focus 170
Chapter 14 Lessons from the Trading Floor on the Other greeks  173
What Happens to the Gamma of ITM or OTM Options
When IV Increases?  .173
Why Do I Need to Weight My Option Portfolio?   175
Gamma Scalping  176

Chapter 15 The Beginning   191


The Option Trader’s Hedge Fund provides traders with a resource that is not only actionable but interesting at the same time. They transform their extensive knowledge of option trading into an approachable means of educating investors of all types. It’s as if the reader gains new trading confidants in Mark and Dennis.”

–Tony Battista, Managing Director, tastytrade Financial Network

“In The Option Trader’s Hedge Fund, Mark Sebastian and Dennis Chen introduce traders to option trading methods that have been utilized by hedge funds for years. This book will help all levels of option traders take their game to the next level.”

Russell Rhoads, CFA, Instructor, CBOE Options Institute

“Thousands of books have been written about stock and option trading. Unfortunately most of these books are completely focused on individual trade structures, and the ones that focus on risk management are completely weighted to the equity side. Until now, nobody has adequately addressed the issue of risk management for investors holding a portfolio of options. Without a solid approach to risk management, no serious trading effort can ever scale. Hedge funds know that because they invest hundreds of millions, sometimes billions of dollars. This new book by Dennis Chen and Mark Sebastian bridges that gap. It is destined to find a place on thousands of desks of private option traders who seek to scale their strategies and effectively manage risk because every serious investor knows that not losing money is the best way to generate a profit.”

Jeff Augen, author of The Volatility Edge in Options Trading andTrading Options at Expiration

“From trade selection to execution, risk mitigation, and volatility analysis, everything you need to know is contained within these pages. Whether you are a newcomer to the options market or a seasoned options veteran, the insight and analysis contained in this book will provide you with the proper framework for your options trading.”

Mark S. Longo, Founder of and The Options Insider Radio Network

About the author

Dennis A. Chen, Managing Director and Chief Investment Officer of Smart Income Partners, Ltd., a hedge fund specializing in option income strategies.  He has been investing and trading equities and options for many years and previously served as a management consultant focused on financial services at Bain & Company. He has experience in the banking, insurance, real estate, computer technology, Internet, publishing, advertising, construction, commodities, quick service restaurant, and automotive industries. Chen holds an MBA from The Wharton School of Business, an M.S. in Computer Science from Arizona State University, and a B.A. inComputer Science from the University of Texas.

Mark Sebastian, COO and Director of Education at Option Pit Mentoring and Consulting, is a former member of both the Chicago Board Options Exchange and the American Stock Exchange. Sebastian makes frequent appearances on CNBC, Bloomberg TV, and Fox Business channel as an expert on options, market volatility, and the S&P 500. He has been published nationally on Yahoo! Finance and quoted by The Wall Street Journal, Reuters, and Bloomberg. An All-Star Contributor for’s Option Profits Team, he is also Managing Editor for Expiring Monthly: The Options Traders Journal. –This text refers to an out of print or unavailable edition of this title.

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