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Keene on the Market: Trade to Win Using Unusual Options Activity, Volatility, and Earnings


Praise for Keene on the Market

"Using the knowledge he obtained in eleven years on the CBOE floor, Andrew Keene worked with our team of programmers to create an algorithmic-based scanner, Option Hacker. Keene on the Market is a comprehensive, straightforward book, taking a trader from options 101 to a seasoned pro. Andrew has been a pleasure to partner with and learn from, and quite frankly, he is one of the best options traders I've ever seen."
—Stanley Awdisho, Cofounder, RB Trader

"This is the perfect 'how-to' manual for trading equity options . . . insightful, succinct, and written with the swagger of a trader who knows how to (and does) make money consistently. Andrew is often my guest on Bloomberg Television because he's effective at explaining how to identify value and manage risk, the same traits that make him a highly effective author. Thanks to this book, you now know his secrets."
—Adam Johnson, Anchor, Bloomberg Television

"Keene on the Market is as entertaining as it is approachable. Keene deftly interweaves stories from his days trading on the CBOE floor while educating his audience with clear, concise explanations of options strategy. As an educator, I've learned that the delivery is equally important as the knowledge you portray. This book will undoubtedly be a must-read for equity options traders for years to come."
—Russell Rhoads, CFA, Senior Instructor, The Options Institute at the Chicago Board Options Exchange

"I've traded equity options for twenty-three years as a vice president at Morgan Stanley and the president of a $400 million hedge fund. When used properly, options are tremendous vehicles to manage risk and shape reward. Andrew does a terrific job of walking readers through options strategies, sharing his years of experience to help individual traders fully understand the risks versus rewards, breakeven points, and more advanced strategies."
Todd Harrison, founder and CEO, Minyanville Media, Inc.

ANDREW KEENE was an independent equity options trader at the Chicago Board Options Exchange for eleven years. He spent most of that time as a market maker in over 125 stocks, including Apple, GE, Sears Holdings, and Goldman Sachs. From 2006-2009, Andrew was the largest independent on-the-floor Apple options trader in the world. Currently, he actively trades futures, equity options, currency pairs, and commodities. Over the last few years, Andrew has become one of the CBOE's most recognized faces in the media, appearing regularly on Bloomberg TV's Street Smart, CNBC's Squawk on the Street, nationally syndicated First Business, and CBOE TV's In the Money with Angela Miles. Andrew received a BS in finance with a concentration in accountancy from the University of Illinois. He can be contacted at

Preface xiii
Acknowledgments xix

Chapter 1 Introduction 1

I Love to Trade 1
From Young Clerk to Respected Market Maker 2
Trading Career at the CBOE 3
The AAPL King 4
From Trading Pit Hotshot to Retail Trader 5
The Live Trading Room: From Options 101
to Complex Strategies 6
Questions 7

Chapter 2 The Life of a Professional Trader 9

Perks of Being a Trader 10
Not Quite as Glamorous as Everyone Thinks 11
The Rollercoaster of Trading 11
This Is Not Monopoly Money 12
It Takes Money to Make Money 12
The Setup 13
Trading Expenses and Opportunity Cost 14
Sticking to a Plan 15
Questions 15

Chapter 3 Trading for a Living: Hobby or Career? 17

Trading for Amusement 17
Enjoying Your Profits 18
Moving from Amateur to Professional 19
Moving from Simulated Account to Real Trading 19
Moving from Simple to Complex Strategies 20
Investing in Your Options Education 20
Go Slow, Go Pro 21
Defining Goals 22
Questions 22
Chapter 4 Who the Players Are: Market Makers 25
DPMs 26
The Death of Market Makers 26
Retail Traders 27
Hedge Funds 28
Institutional Traders 29
Options Exchanges 30
Questions 31

Chapter 5 Options Brokers and Platforms: The Right Options Broker for You 33

Full-Service Brokers and Options Trading 34
Discount Brokerage Firms 35
Researching Discount Brokers Firms 36
Options Brokerage Firms’ Fees 37
Use of Margin 37
Automatic Liquidation 38
Questions 39

Chapter 6 Technical Trading: Security Timing Tactics 41

Support and Resistance Levels 43
What Is a Gap? 43
Dow Theory 44
Elliott Wave Theory 44
Moving Averages 45
Fifty-Day Moving Average 45
Forty-Week Moving Average 45
Magnets and Targets 46
The Stochastic 46
Other Charts, Technical Indicators, and Money Supply 46
Japanese Candlestick Charts 47
Disadvantages to Moving Averages 47
The Ichimoku Cloud 47
Summary 48
Questions 48

Chapter 7 Reading the Market and Implied Volatility: Market Sentiment 51

Make Money in Any Direction 51
The Concept of Beta 52
When to Be on the Sidelines 53
Questions 54

Chapter 8 Options Basics Primer: What Are Options? 57

What Are Derivatives? 57
What Are Calls and Puts? 57
What Is an Underlying? 59
Options: A Deeper Look 60
Another Example in the GLD 60
Options Premium 61
Options Definitions 62
Option Pricing: Complex Models 62
Questions 64

Chapter 9 The Greeks 67

Delta 67
Gamma 68
Theta 69
Rho 70
Vega 70
Questions 71

Chapter 10 Call and Put Trading Strategies 73

Long Calls 73
Using Calls Bearishly 75
Long Puts 76
Using Puts Bullishly 78
Selling Options 79
Time Decay with Short Options 80
Short Calls 80
Short Puts 82
Deeper Look at OTM Calls and Puts 85
Is Risk versus Reward of the Option Trade
Limited or Unlimited? 85
Where Is Breakeven on an Option Trade? 86
Questions 86

Chapter 11 Why Is Everyone Long Stock?: How to Use Options for a Hedge 89

The American Dream 90
I Have Insurance on Almost Everything 91
The Famous Covered Call 92
The Zero-Cost Collar 95
Summary 98
Questions 98

Chapter 12 What Are Synthetic Options Positions? 101

Synthetic Long Stocks 101
Synthetic Long Stock = Long Call + Short Put 103
Synthetic Short Stock = Short Call + Long Put 105
The Goal of Making Synthetics 107
Synthetic Long Call = Long Stock +
Long Put - Strike Price 107
Synthetic Short Call = Short Stock +
Short Put - Strike Price 109
Synthetic Long Put = Long Call +
Strike Price - Short Stock Price 110
Synthetic Short Put = Short Call +
Strike Price - Long Stock Price 112
Questions 114

Chapter 13 What Is Volatility and How Does It Affect Options? 117

Basics of Volatility and Options Trading 117
Historical Volatility 118
Implied Volatility 118
Volatility Is a Trader’s Best Friend 121
CBOE’S VIX Index 122
CBOE’s VIX: More Than a Fear Indicator 123
Contango versus Backwardation 123
Questions 124

Chapter 14 Various Uses of Options and Why I Love to Trade Them 127

Leverage 127
Flexibility 130
Risk Control 130
Trader’s Edge 130
Hedge versus Speculation 131
Complex Options Strategies 132
“If Only I Had Bought Those Calls!” 133
When in Doubt, Hands Out 134
What It Takes to Make a Bigger Trade 134
Questions 136

Chapter 15 More Complex Options Strategies 139

Long Straddles and Strangles 139
Short Straddles and Strangles: Beware
Blowout Risk! 143
Butterflies and Condors 146
Questions 153

Chapter 16 Managing Trades on Expiration 155

Long Call--Long the FB November 23 Calls 156
Short Call--Short the AAPL November 500 Calls 158
Long Put--Long the MSFT November 27 Puts 159
Short Put--Short the GOOG
November 650 Puts 160
More Complex Trades 161
Long Call Spread--Long the FB
November 23-25 Call Spread 161
Short Call Spread--Short the AAPL
November 500-520 Call Spread 162
Long Put Spread--Long the MSFT
November 27-25 Put Spread 164
Short Put Spread--Short the GOOG
November 650-630 Put Spread 165
Long Straddle--Long the FB Nov 23 Straddle 166
Short Straddle--Short the MSFT
November 27 Straddle 167
Long Strangle--Long the AAPL
November 480-500 Strangle 168
Short Strangle--Sell the GOOG
November 650-670 Strangle 170
Short Iron Condor--Selling the FB
November 23-21 Put Spread and Selling
the FB November 25-27 Call Spread 171
Short Condor--Short the MSFT
November 27 Straddle and Long the
25 Put-29 Call Strangle 173
Long Call Butterfly--Long the FB
November 23-25-27 Call Fly 174
Long Put Butterfly--Long the MSFT
November 27-25-23 Put Fly 176
Questions 178

Chapter 17 Andrew Keene’s Non-Blowout Trading Plan: How Much of Your Portfolio Can You Risk? 181

Trading Pepsi Back in the Day 181
Now That I’m Upstairs . . . 183
Limiting Your Exposure to a Percentage of Your Total Book 184
Andrew Keene’s Confidence Scale: Ranking Every Trade from 1 to 5 185
Every Trade Is a Percentage of My Book 188
Andrew Keene’s Non-Blowout Trading Plan 189
Questions 192

Chapter 18 Andrew Keene’s OCRRBTT Trading Plan 195

Story of the OCRRBTT Trading Plan 195
Reading Options Paper 196
What Call and Put Volume Means to a Trader 197
How Insiders Read Paper 198
Using the OCRRBTT Trading Plan 199
Conclusion 201
Questions 202

Chapter 19 Trading Earnings (HIMCRIBBIT ) 205

HIM: Historical, Implied, Measured 205
Which Type of Option? 207
C: Chart 207
RRBTT: Risk versus Reward, Breakeven,
Time, and Target 208
Calendars and Advanced Topics 210
Trading for a Living 210
Confidence Scale 211
Tricks and Tips 212
Questions 215
Conclu sion 217
Answers to End-of-Chapter Questions 219

About the Author 223
Index 225