Trading Options for Edge – Profit from Options and Manage Risk Like the Professional Trading Firms : [PDF Download]

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“Before executing the trade that has edge, make sure that it actually has edge. How is this done? By quickly finding an option to buy or sell, you reduce the risk of the edge trade dramatically.

This can be a calendar spread if term structure is off; this can be a credit, debit, or butterfly spread if there is a long strike out of whack. In determining the option to buy, one must spend the time to evaluate the curve (skew) and term structure.

If going with term structure, make sure that overall IV matches with the trade. In determining a spread within the same contract month, the vol curve is key. We will dig into setting up these spreads on an individual basis in an upcoming chapter.

The key is to be aware that in order for a trade to actually be a good trade, there must be something to buy or sell at the wrong price, and, on the other side of the trade, that the same thing is bought or sold at a fair price at a minimum (or in a perfect world, at a price that is too high or low depending on what you are hedging, so that you could make money on both sides
of the trade).”

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