CONTENTS

CHAPTER 1_

Picking Up Where The Rest Leave Off Synthetics 1

The Nature of a Position 2

Story: Covered-Write 2

Another Word about Covered Writes 3

Locks 5

Synthesis: Using a Conversion/Reversal (C/R) 5

Fair Value Equations 6

Put-Call Parity 8

Position Dissection 101 10

Net Call Contracts and Net Put Contracts 11

Common Locks Carded Up 12

Tools for Dissection 14

Synthetic Alternatives 17

10 Examples of Long 10*45/50/55 Butterflies 19

The Risk Profiles 19

Other Risk Profiles 26

CHAPTER 2_

A Cause for Adjustments 27

Trading Barrage 27

An Argument for Box Dissection 30

Adjustment Alternatives 36

Managing the Beast 37

Adjustment Costing 43

Rule the Beast 44

Option Metamorphosis 45

CHAPTER 3_

Nuts and Bolts of Options 48

Profit and Loss (P&L) Scenarios 48

Glancing Greek to Greek 51

Implied Volatility 52

Risk 53

Neutrality Depends on One's Perception 55

Delta 56

Gamma 57

Relatively Gamma 59

Theta 59

Vega or Omega 60

Rho 61

Dividends 62

Exercise Nuances Involving Equities with Dividends 65

Nuances of Different Styles of Contracts 65 Exercise Nuances as they Relate to Interest Income or Expense 66

To Exercise or Not To Exercise? 67

Renting Options 68

Pin Risk 75

After Expiration News Event 76

Do Not Forgot to Exercise 78

Renting Stock Options 78

Cost of Doing Business 79

A Final Word 80

CHAPTER 4_

Strangles And Straddles 81

Reasons for Buying and Selling Premium 81

Properties of Straddles and Strangles 82

Gamma Scalping 85

Dissections of the Gamma Scalps 91

Gamma Scalping Effect on Pricing 91

Dynamic Gamma Scalping 93

Spread Scalping 94

Break-Even Analysis 95

Missing the Hedge 97

CHAPTER 5_

Verticals (Bull And Bearspreads) 99

Speculative Considerations When Using Verticals 100

Premium: Time and Implied Volatility Effects 101

Vertical Bamboo 102

Isolating the Speculation 104

Neutral Premium 106 Hedging Underlying Into a Vertical (Fences, Collar, Tunnel) 106

Rolling to Adjust Speculative Trades Using Verticals 109

Rolling into or Using Verticals 110

Volatility Trading 113

Pricing of Ratios 115

Defensive Flattening of Ratio Spreads 117

Assessing Risk in Ratio Spreads Through Ratio Analysis 119

Unbelievable Moves 121

CHAPTER 6_

Wingspreads 125

Butterfly Structure 125

Condors and Stretched out Butterflies 130

Iron Wingspreads 133

Pricing 134

Options Matrix 135 Using Butterflies to Speculate Directionally Can be a Challenge 136

Time Out for a Quick Lesson 138

CHAPTER 7_

Timespreads 140

Jelly Rolls 141

Jelly Roller 142

Calendar Spreads: Briefly 144

Time Spread Value 145

Time Spread Price Arc as a Pricing Tool 146

Diagonals 147

Exercise/ Assignment 148

Conclusion 149

CHAPTER 8_

Market Makers Insights 150

The Edge 151

Fair Value Equations Including Banking 154

Interest Rate Exposure 155

Banking: The Concepts of Borrowing and lending 155

Short Sock Inventory Problems and Squeezes 157

Equity (Stock) Reversal (Without Dividend) 158 Implied Interest Rate on an Equity

Conversion/Reversal (No Dividend) 160

Interest Rate Setting in Your Options Pricing Tool 161

Equity Conversion/ Reversal (With Dividend) 163

Jelly Roll: Equities 164

OEX Conversion/ Reversal 165

OEX Synthetic Futures and Theoretical Values 165

OEX Early Exercise 167

Boxes 169

European-Style Boxes 170

Implied Interest Rate on a Box Trade 171

The Equity Box 171

Exercising and the Money 172

Explanation of Residual Price 174

Stocks Involved in Tender offers 175

Deal Date 176

The Pro Rata Factor 176

Borrowing Shares 177

The Chiron Tender Offer 178

Other Tid-Bits 182

Tax Games 182

Interdepartmental Games 183

Bad Creditor Borrowing Games 183

Conclusion 184

CHAPTER 9_

Option Dialogue 185

Getting Started 186

Pulling the Trigger 192

Conclusion 230

GLOSSARY_231

INDEX_280