Lecture Notes on Options and Futures Trading

Introduction to Options Trading

• Options trading can be a method for active investment.
• Potentially higher returns but complex and challenging.
• Lecture by Tom Sausnoff, founder of Thinkorswim and Tasty Trade.

Foundations of Options by Jamal Chandler

Why Trade Options?

• Capital Efficiency: Leverage allows participation in markets despite high stock prices.
  • Options allow trading expensive stocks efficiently.
  • Defined and undefined strategies available.
• Strategy and Product Diversification:
  • Trade in any market condition (up, down, sideways).
  • Optimize mechanics and reduce P&L volatility.
  • Early management of trades can eliminate tail risks.
• Probabilities: Options allow defining risk and probabilities.
  • Higher probability of success with certain strategies.
• Types of Trades:
  • Defined risk trades for limited capital.
  • Undefined risk trades offer higher success probability.

Industry Innovations

• Advancements in technology and trading platforms.
• Reduced trading costs and improved liquidity.
• Product innovations with new products like ETFs.

Probability and Finance in Options

• Probability Distribution: Used to estimate potential outcomes.
• Option Pricing Skew: Different pricing for puts and calls due to delta adjustments.

Volatility Trading

• Implied Volatility: Indicates market fear and affects option pricing.
• Expected Moves: Essential for setting strike prices.
• Strategies vary with market volatility levels.

Constructing a Trade

• Choosing Assets: Liquidity is crucial for both entry and exit.
• Duration: Optimal decay occurs in 45-21 day window.
• Strategy Selection: Based on market conditions and volatility.
• Delta and Risk Management: Choose strategy based on available capital and market expectations.

Managing Trades and Portfolio by Tom Sasnoff

Risk Management

• Importance of managing trades to mitigate outlier risks.
• Managing early reduces risk and increases P&L.

Portfolio Management

• General guidelines for trade size and allocation based on VIX and net liquidity.
• Diversification through underlying products, strategies, and durations.

Futures Trading by Pete Mulmat

Introduction to Futures

• Futures as a liquid, efficient trading option.
• Neutral security: can be easily bought or sold.
• Range of tradable products (equities, metals, energy, etc.).

Benefits of Futures

• Capital Efficiency: Requires less capital due to leverage.
• Liquidity: Trade 23 hours a day.
• Diverse Product Access: Offers exposure in various markets.

Trading Strategies

• Scalping and day trading rooted in probabilities and statistics.
• Futures options offer capital efficiency similar to equity options.

Law of Large Numbers

• Diversified, independent occurrences improve trading outcomes.

Advanced Futures Trading by Tom Sasnoff

Allocation and Management

• Futures as a lead product due to liquidity and leverage.
• Use as both speculative and hedging tools.

Strategies and Pairs Trading

• Pairs trading reduces risk by correlating highly related products.
• Manage trade size and roll positions using delta adjustments.

Expected Move and Probability

• Futures options follow similar models as equities for expected moves.
• Understanding expected moves is crucial for strike selections.

Conclusion

• Options and futures trading offer diverse strategies for active investment.
• Leverage and diversification are key components.
• Advanced strategies and tools can optimize returns within a well-managed portfolio.