I recently read "Macmillan Talks Options" for the second time. Frankly speaking, this is definitely not a novice-friendly book. However, many high-level strategies in it have inspired me a lot now (but very few people will read this article, and this book can be regarded as a Bible for professional traders). Many of these points have a greater impact on me (note: this article is more than 10,000 words, so you need to be patient to read it. Macmillan briefly introduces Buffett in the option circle). The content and personal thoughts are summarized as follows:
1. [Understanding of exercise of rights]
①90% of options have no value at expiration (including early closing and unexercised options); however, Macmillan mentioned that many professional traders’ buyer positions will be greater than seller positions, which is very different from some professional Trader strategies that I am now exposed to. In itself, I think there are more long-term seller positions.
②Most "customer" account traders holding Option prefer to sell options rather than exercise them. There are two reasons:
Buying BTC requires more capital than buying options;
The commission for Option trading is lower than the commission for 2 BTC transactions (the 2 commissions are: commission is required to buy BTC after the call option is exercised, and commission is required to sell BTC in the future; full-time traders care very much about these friction costs, the number of transactions The friction will be great after too much)
2. [Factors affecting Option price]
In fact, some friends also asked this question during the community AMA yesterday.
Several attempts have certainly been made to find a non-linear positive correlation between volatility and option prices.
Options cannot earn interest from the underlying (for example: ETH's POS; or BTC's dividends), and the option price only reflects the underlying price. If the APR of POS increases, the PUT option price will rise due to the expected underlying fall, while the call option price will fall.
Volatility is a measure of how quickly an underlying price changes. If the BTC spot or futures price can change significantly in a short period of time, then it can be said that the underlying price fluctuates violently.
When it is judged that the price of BTC fluctuates in a favorable direction, whether the option value rises is related to the stock price, exercise price and expiration time.
3. [Understanding of delta]
Any at-the-money call option (BTC, index or futures) has a delta slightly above 0.50 (at-the-money put options have a delta slightly below 0.50). The reason is that spot ETH or futures prices can rise higher (theoretically, they can rise indefinitely), but they cannot fall deeper (can only fall to 0). This means that the probability of the underlying price rising within a certain period of time is higher than 50%. The at-the-money call option delta reflects this.
Option delta is affected by the passage of time. As time goes by, the delta of an out-of-the-money option gradually approaches 0.
This shows that as the expiration time gets closer, out-of-the-money options become less and less sensitive to short-term underlying price fluctuations, and the corresponding fluctuations in option prices become smaller and smaller. Sometimes extreme situations can help with understanding. For example, on the last trading day, any out-of-the-money option delta that is one strike price distance or more away from par value is likely to be 0 - these options will expire worthless, and a 1-point fluctuation in the underlying price will not cause These options fluctuate in price. On the other hand, if an out-of-the-money option has a long time to expiration (such as 1 year), then the option price will reflect the fluctuation of the underlying price. The higher the time value of an out-of-the-money option, the further away the delta is from 0.
The opposite is also true for real options: as time passes, real option delta approaches its maximum value. Again, it's helpful to consider extreme cases to aid understanding. On the last trading day of the option, the price movement of any slightly in-the-money option is consistent with the movement of the underlying.
4. [Technical Analysis]
Technical analysis attempts to time buys and sells and is therefore more suitable for short-term trading. Fundamental analysis is a good long-term analysis tool, but in the short term it is easy to predict price fluctuations too early (too late), so it is not timely. (In 22 years of actual testing, what I am better at is about 1-month deep virtual options with coverage and no cover, and no coverage and cover; what I am currently practicing and learning are 1-3 week options)
The short-term nature of most options trading strategies makes fundamental analysis of little use and technical analysis is a better approach. (especially BTC and ETH)
Positions should be closed promptly when profits are made. (The position will be actively closed when the profit from selling the Call or Put strategy exceeds 75%)
Buying options is considered one of the most speculative trading activities. But there are often different ways to structure a strategy. In these different ways, one can change a strategy from speculative to conservative, or at least prudent.
For the average trader or novice, the main attraction of buying options is leverage. (Leverage is not recommended for novices, 1 to 1)
Professional spot (B or E) traders usually use options for one purpose: to reduce the investment required in a position.
They are not seeking the high returns brought about by leverage, but simply replacing the underlying assets with options. To establish an options position that is essentially equivalent to a BTC position, you should buy in-the-money options that are almost ready to expire.
By buying real-money options, you can reduce time value costs. Time value refers to the portion of an option's value that is consumed over time. The entire value of an out-of-the-money option is composed of time value. Real options have little or no time value.
The smaller the delta, the more aggressive the call option is.
If you look at delta from an equally correct perspective, as the probability of being in-the-money when the option expires, then you can see how speculative it is to buy out-of-the-money options.
After taking profits, sell part of the position. This applies to any kind of investment - BTC, options, futures, bonds, etc.
It can not only realize existing profits, but also "retain" BTC positions. To do this, simply sell the options you hold (the ones that are profitable) and buy an equal amount of options at the next strike price. The best time to implement this strategy is when the stock price has reached the next strike price, so you are selling an in-the-money option and buying an at-the-money option.
5. [Sell options]
Selling deeply out-of-the-money options is likely to expire worthless, and it is not a truly conservative way to sell covered calls.
Selling deep out-of-the-money calls is a radical approach. (compared to Put)
A relatively conservative method of selling covered options is to sell in-the-money call options on the purchased BTC. In this case, the strategy can provide downside protection as long as it is not lower than the option strike price (which is far from the current spot price).
In general, selling cover is generally used as a small-up strategy, and investors can make a profit if the stock price rises or remains relatively unchanged before the expiration date.
Naked put options are high risk.
Usually I would prefer the strategy of naked selling put options for 2 reasons: ① You only need to consider the bid-ask spread of 1 product instead of 2; ② The margin requirement is much smaller
The strategy of naked selling PUT options is generally implemented in the following way: If you like selling and are willing to buy and hold the underlying out-of-the-money put options, then you are in an "invincible position."
If the spot price goes up, you earn the put option premium. on the other hand,
If the stock price drops below the exercise price of the put option, you buy the BTC at a low price.
When LEAPS (options with expiration dates that can be extended to 2 years) are introduced, only options with the largest and best BTC as the underlying are usually listed, instead of BTC with high premium and high volatility.
One way for naked sellers of options to hedge their positions is to sell naked puts and naked calls at the same time. Because unless volatility rises, they are unlikely to lose money at the same time, and one party's profit may be greater than the other's loss.
Since both put options and call options are sold at the same time, there is risk in both rising and falling prices. However, if the price of BTC remains relatively unchanged, this strategy has greater potential profits.
Covered straddle. The investor buys 1 BTC and sells 1 straddle option at the same time.
A covered straddle (which is selling 1 covered option and 1 naked put option) is equivalent to selling 2 naked put options. Selling 2 naked puts directly is more efficient than selling a covered straddle. Its effectiveness is reflected not only in the margin requirements, but also in the fact that a covered straddle involves 3 different securities (underlying, call and put), while a naked put involves only 1. Therefore, selling only 2 naked put options can reduce commissions and avoid dealing with 3 bid-ask spreads.
If you are typically a naked seller of call options, you can limit your risk by buying calls that are more out of the money than the calls you sell. The call option you hold limits your losses if the underlying price rises sharply, so you no longer face unlimited risk by selling the option.
A bull spread is a vertical spread, usually buying a call option and selling a call option with a higher strike price (generally, both have the same expiration date)
When the underlying price is close to or lower than the lower strike price in the spread when the spread is established, the potential profit will be several times greater than the potential loss. If the initial underlying price is between the two strike prices, the potential profit and potential loss are approximately equal.
Finally, if the initial underlying price is equal to or higher than the higher of the bull spread strike price, which means that the two options are in the money at the beginning, then the risk is greater than the potential profit, but the probability of profit is also greater.
If the underlying is highly volatile, investors should not hesitate to pay for the time value of holding in-the-money options, given that implied volatility and historical volatility are nearly identical, as it may be worth it.
Shortly after buying a bull spread, the underlying makes a nice move up, and you may be disappointed with the gains at that time. In practice this often causes bull spread holders to "hang around," thinking they will make better profits if they just hold on to the position, only to eventually find the underlying price falls back and the profits disappear.
Bull spreads are a low-risk, low-potential profit strategy, especially if you close your position before expiration, but many investors don't think so when establishing bull spreads. In order to obtain higher potential profits, investors need to construct a spread where the underlying price is close to the lower strike price, or directly buy the call option without using the bull spread.
Another way to construct a position with the same profit potential as a bull spread: Long the underlying, buy 1 out-of-the-money put (limiting downside risk), and sell 1 out-of-the-money call option (limiting upside potential profit). This position is called the collar strategy and is a very popular strategy for protecting BTC positions.
While it is sometimes tempting to use a spread to hedge the cost of an expensive option, you should still evaluate why the option is so expensive and how much the underlying moves. If the reason why the option is expensive is that the underlying asset may fluctuate greatly in the short term, then it is reasonable for the option to be expensive and the spread is not a good choice. Additionally, if options are expensive simply because the underlying price has been stable, or if the underlying price may not fluctuate much in the future, then spreads may be a desirable strategy.
The main problem with selling naked options is that the risk is unlimited—or at least enormous—when the underlying experiences sudden moves or an opening gap. [Everyone says selling naked is risky, and novices can’t learn it without suffering some losses]
The margin requirement for a credit spread is simply the difference in strike prices minus the income.
Expected value states that if we use this strategy for long enough, we will earn nothing and lose commissions.
Why do the results of mathematical analysis run counter to reality? The math says "don't waste your time on these spreads", but the reality is that these spreads have been very profitable so far. One of the reasons why the math doesn't match reality is that it assumes a random market, and for the past few years, it's been a bull market for most of the time. That's not to say the math is wrong, though. If you tossed a coin 100 times and 90 times the coin landed on heads, would you say that the probability of heads on the next toss was greater than 50%? You might, but you'd be wrong. The probability is still 50%.
If what you need is reduced risk and the higher leverage that comes with low margin requirements, then lender spreads are attractive as an alternative to naked put options. But it is not better from a statistical point of view.
A more radical approach is to continue to hold long call options after the short call option expires. This is not recommended for calendar spreads.
Suppose you are interested in constructing a bull spread, but you also notice that near-term options are expensive compared to forward options. This kind of situation often occurs in the rapidly fluctuating BTC, or when there is gossip. Therefore, rather than buying a bull spread, a trader may decide to use a diagonal spread, thereby still having the possibility to go long but also reaping the benefits of short-term option time decay.
Overall, diagonal spreads can be an attractive alternative to vertical spreads, especially when near-term options are more expensive relative to forward options. [Now that I have the opportunity to have diagonal spreads, I will not use vertical spreads]
One more thing to consider with any spread is the relative pricing of the 2 options in the spread. If the option bought is "undervalued" relative to the option sold, the spread has a statistical "advantage"
“Advantage” does not guarantee profitability
6. [Ratio strategy]
Ratio strategy or ratio arbitrage are two of the most commonly used strategies nowadays along with diagonal strategy.
If the initial price of the underlying is equal to or lower than the lower strike price in the spread, you can often make a profit when it moves toward the higher strike price. In this case, many traders prefer to take profits at the time rather than wait for the option to expire.
The real beauty of the call ratio spread is this: you can sit back comfortably with little or no downside risk (even though the capital is tied up, that capital can be in short-term bonds, so at least it earns short-term interest). If the underlying price fluctuates, you have a good chance of closing the position and making a profit. The risk is that if the underlying rise is explosive, you won't have the opportunity to close the position when the price exceeds the higher strike price. In particular, when the underlying price is close to the target price, there will be a jump or limit.
The main difference between call ratio spreads and put ratio spreads (especially for BTC options and US stock index options) is that the underlying usually falls faster than it rises, so if BTC suddenly starts to fall, you may be in a situation like "hold on" Tiger's Tail" situation.
If a strategy involves holding more options than you sell, so that there is theoretically a large or unlimited profit potential, then the strategy is known as an inverse spread. (Commonly used bullish inverse spread strategy)
Typically, call option inverse spreads are constructed when the underlying price approaches a higher strike price. When a strategic trader establishes a position using this method, he hopes that the target will fluctuate in a certain direction and thereby obtain a certain profit [The current market conditions are more appropriate, and the market has been preparing for breakthroughs]
Another factor experienced inverse spread traders consider when establishing such spreads is cheap option prices. If options are "underpriced" in the sense that the likelihood of future price increases increases, then the quantitative advantage of the option longs in the spread can be profitable. Additionally, if you're lucky, short options are more expensive than long options in an inverse spread portfolio, so the spread has another built-in advantage.
Both views appear to be valid, so large moves in either direction are possible. This satisfies the first criterion for using an inverse spread - that is, the possibility of the underlying moving significantly in one direction.
In an inverse spread, if the market goes up, you just keep moving the call option you bought to a higher strike price. The sold call option remains intact and provides downside protection if the market declines.
7. [Options as underlying agents]
The time value of an in-the-money put option is smaller than that of an in-the-money call option, making it generally easier to find a suitable put option. Whether called or put, real-money options can reflect almost all short-term fluctuations in the underlying, which is very attractive to short-term traders.
If an investor sells BTC and buys call options, then he gets a considerable amount of money from the market.
8. [Insurance strategy for options]
Buying BTC put options is the most effective insurance strategy for individual stocks. This approach (buying put options on individual stocks as insurance for individual stocks in a portfolio) is often the most efficient and cheapest BTC insurance strategy. You just need to buy a shallow put option holding BTC.
You can also use index or sector options to protect your entire portfolio. This method is simpler. You only need to place an order and pay a commission to establish an insurance strategy. The problem with using index options is two-fold: ① There is definitely tracking error (tracking error is used to describe the performance difference between a portfolio and a broad-based index); ② Index options trading is often accompanied by artificially high implied volatility, which means This means you'll be paying an "overprice" for the protection you get.
Other methods of measuring volatility familiar to options traders are historical volatility and implied volatility for BTC options. You can also calculate the historical volatility and implied volatility of an index or industry and its options, or you can calculate relative beta by dividing BTC volatility by index volatility.
Although it is intuitive that historical volatility can better reflect the future performance of BTC, that is, it reduces tracking error, it is actually feasible to use historical or implied volatility to calculate relative beta.
9. [Neckline Strategy]
The price of long-term options (LEAPS) follows a log-normal distribution (similar to the price distribution of leading U.S. stock companies), so the best options for constructing a collar strategy are long-term options. (used less)
Generally speaking, the higher the volatility and the longer the maturity, the greater the difference between the exercise prices of call and put options at the same price.
In contrast, if an investor attempts to construct a collar strategy using short-term options, it is unlikely to find a large difference in the strike prices of call and put options at the same price. The reason is the way stock prices are distributed. The market is lognormally distributed (biased toward the upside), and out-of-the-money call options with long maturities can be quite expensive (at-the-money or out-of-the-money put options are relatively cheap).
10. [Predictive power of options]
If call options are heavily traded, you can expect positive news to be announced soon and buy the underlying. If put options are trading in excessive volume, then bad news may be on the horizon and short selling is feasible. If both put and call options are heavily traded, my experience is that BTC will mostly move in a positive direction, but not always; in this case, be prepared for BTC to break out in either direction.
Experience tells us that it is only worth acting when the total options volume for the day exceeds twice the average options volume. If the option is actively traded, a larger ratio will be required
If the vast majority of options trading volume is concentrated in one option contract (that is, just a call option contract or a put option contract), then it is likely that nothing special will happen to this BTC. For example, if most of the trading volume is concentrated in a call option contract, it is likely that institutional investors are selling call options because they hold BTC.
If insider traders are buying options, then a significant portion of the options trading volume will be at-the-money or out-of-the-money options. Remember, they want to use leverage, so they will generally buy the cheapest options available. Therefore, if you see that the majority of the day's trading volume comes from deeply in-the-money options, you can be fairly confident that such a scenario can be ruled out.
Generally speaking, I tend to buy short-term, in-the-money options because they have little or no time value and, therefore, behave almost identically to BTC.
Trading BTC is often preferable to trading options. BTC is more liquid, bid-ask spreads tend to be tighter, and stop-loss orders can be used. I do not recommend using stop loss orders in options.
When options are more expensive, I will use a bull spread strategy or even an out-of-the-money bull spread strategy.
12. [Delta Neutral Transaction]
Big guys love to talk about Delta Neutral and DDH (Dynamic Hedging)
If the delta value of the position is very close to 0, then it is a neutral position, and the profit and loss are not affected by the rise or fall of the underlying asset. This indicator is very useful if you want to hedge your position risk by simply opening an equivalent but opposite position in the underlying BTC.
In theory, if you sell an "expensive" option and simultaneously buy a "well-priced" option as a hedge, you can profit by capturing the difference in that neutral position. The math is theoretically feasible, but actually trading neutral positions is much more difficult than imagined. Neutral trading can be in danger if you are not careful when trading. [The friction cost of opening DDH after multiple leg protection will be very high. Many high-end strategies must be suitable for you, but they are not suitable for most retail investors. To put it bluntly, you will not be exempted from transaction fees]
The other variables that affect profit and loss in a delta neutral position are not necessarily neutral. When holding a delta neutral position, small short-term fluctuations in the underlying will not cause profit or loss. However, if the underlying stock price rises or falls too much, as time passes, or the implied volatility changes, the delta value of each option in the position will change, and the overall position will no longer be delta neutral. In fact, these situations pose considerable risks.
A delta-neutral position is very deceptive; such a position is delta-neutral only if the underlying price does not move much.
If an option becomes more expensive or cheaper because of a change in implied volatility, the delta will change accordingly.
Position neutrality can be significantly affected by changes in price or implied volatility.
13. [Forecast volatility]
And only when the future volatility predicted by implied volatility is unusual, a comparison of implied and historical volatility can be used. Therefore, if IV is low compared to RV, then it is generally expected that implied volatility will increase. In this case, the appropriate strategy is a strategy for buying options, such as buying a straddle. If the implied volatility is at a high level compared to the historical volatility, then under normal circumstances it is believed that the implied volatility will decrease and eventually remain consistent with the historical volatility. At this time, the appropriate strategy is to sell options. However, if you suspect that implied volatility is very inconsistent with historical volatility for some special reason, then volatility trading should not be used. (IV is usually higher than RV, so experience should be used when making judgments)
Expensive options are sometimes a harbinger of corporate news. Especially when options become very expensive and actively traded, news about major corporate events, such as corporate acquisitions, lawsuit rulings, government agency decisions, unexpected earnings reports, etc., are close at hand, and the underlying price It will also change significantly as a result. At this time, you should avoid selling options with high implied volatility. Comparison of Historical Volatility and Implied Volatility
Volatility trading tends to be attractive when there is a discrepancy between implied and historical volatility. This happens more frequently. However, it is not enough to simply be very different. Still need to know the implied volatility and historical volatility levels over the past few months or 1 year
Grasping the historical range of volatility is much more important than just analyzing the relative position of current implied volatility and historical volatility. Using the latter alone for analysis will lead to erroneous conclusions and resulting trading losses. Additionally, strategies for selling volatility often involve selling naked options, so analysis should be done with extreme caution before taking a position.
Generally speaking, when implied volatility is outside its previous range, especially when the underlying (BTC) is also rising at the same time, you should not consider a strategy of selling volatility.
14. [Trading Implied Volatility]
However, in the U.S. stock market, the crypto market, and the mainland options market, high-frequency trading volatility players are now second only to market-making strategy players.
As a volatility trader, you do not need to predict the underlying price trend, but only need to predict future volatility. Therefore, it is common to start with a neutral position
When implied volatility is "too high," strategic traders will want to sell volatility and pocket the difference when volatility returns to more normal levels. When it comes time to sell volatility, I tend to use one of two strategies: 1) selling a wide straddle naked, or 2) a ratio spread.
When selling volatility, I also tend to choose relatively short-term options
I prefer wide straddles to straddles because the price range over which they can be profitable is wider than straddles. (Basically only use the wide span type)
If the underlying price is near the strike price at expiration, you can make more profit by selling a straddle option, but the profitable price range of selling a wide straddle option is wider. When the underlying price moves in an unfavorable direction, some adjustments often have to be made. Using wide straddle options can reduce the number of similar adjustments to a certain extent
Volatility traders buy volatility when it is "too low." In this case, there are three strategies that can be adopted: ①Buy straddle options, ②Inverse spread, ③Calendar spread
When buying volatility, I generally buy straddles that are 3 or 4 months from expiration.
There are two reasons for choosing this time. First, time does not decay too quickly for a 3-month straddle. There is no doubt that time works against straddle holders' profits to some extent. Secondly, the underlying price will likely rise or fall significantly.
If volatility rises, option 1 (closing the straddle) is appropriate. If the implied volatility and historical volatility still remain in the 1st or 2nd quantile, then the second option (adjusting again) is more suitable; this is usually not the case when the underlying price is close to the breakeven point. .
If you think the market is more likely to move in a certain direction, you can use an inverse spread instead of a straddle.
Relatively speaking, when the implied volatilities of individual options are different from each other, traders will use them to construct inverse spreads.
Calendar spreads are heavily affected by volatility
New traders often establish calendar spreads when volatility is high. That's very appealing, but it's not.
When implied volatility is low, using calendar spreads is more appropriate. It can reduce the probability of lower volatility harming the spread (profit), while increasing the probability of an increase in spread (profit) due to rising volatility.
When implied volatility is low, using calendar spreads is more appropriate. It can reduce the probability of lower volatility harming the spread (profit), while increasing the probability of an increase in spread (profit) due to rising volatility.
If you want to sell volatility, then 2 suitable strategies are the ratio spread (which can be built with either calls or puts) and the naked selling combination. If you want to buy volatility, it is appropriate to buy inverse spreads (can be with calls or puts), buy straddles, and calendar spreads. Additionally, the best time to use spread strategies (ratio spreads, inverse spreads, and calendar spreads) is when there is a skew in option implied volatility.
If you want to buy volatility, buy inverse spreads (can be call or put options), buy straddles, and calendar spreads
If the implied volatility of a short-term option trade is significantly higher than that of intermediate-term or long-term options, then calendar spreads should be used (again, assuming that the implied volatility decile is not high).
In addition, sometimes options with lower strike prices have higher implied volatility than options with higher strike prices. In this case, a put ratio spread (if implied volatility is generally higher) or a call inverse spread (if implied volatility is lower) would be attractive.
15. [Greek letters]
Options with longer remaining time to expiration will have more modest delta changes. In turn, the delta changes of short-term options will be more dramatic.
The delta value of short-term out-of-the-money options will not change significantly when BTC changes (even if the underlying changes significantly)
We have seen that changes in the underlying price will cause the delta value to change. In addition, the passage of time will also change the delta value. The third major factor that affects the delta value of call options is volatility.
Low-volatility BTC options have less time value, so out-of-the-money options are less sensitive to short-term (low-volatility) BTC fluctuations, while in-the-money options are very sensitive
This means that the delta of out-of-the-money options on low-volatility BTC is small—perhaps close to zero—while the corresponding delta of in-the-money options is higher.
Implied volatility can suddenly rise for a variety of reasons. One is an important company announcement, such as the FDA ruling in this example, or the lawsuit judgment mentioned earlier. Another factor that contributes to the sharp rise in volatility is the perceived change in the future price of the underlying asset.
Essentially, the delta of these options is changing dramatically. To picture this, look at the previous diagram and imagine that the delta value on one curve suddenly moves to another curve without any change in the stock price. It is important for traders to understand these concepts so that they understand that any "neutral" position is risky; neutral simply means that the position is initially neutral with respect to one (or several) variables. Subsequent changes in other variables may negatively affect this neutrality. As we saw in the delta example discussed earlier in this chapter, when the underlying price changes, the initial delta-neutral position becomes quite non-neutral.
Nothing has a greater impact on option prices than volatility. Changes in implied volatility can have a large short-term impact on option prices.
It is LEAPS long-term options that profit from rising interest rates. Gamma value measures the change in option delta value every time the underlying price changes by 1 point. Essentially, it measures how quickly delta changes.
If gamma and delta values can be neutralized, then the associated option position will continue to be delta neutral even if the underlying price changes.
If the expiration time is long, the gamma value of the option remains relatively stable regardless of whether it is in-the-money or out-of-the-money.
When the stock price is close to the exercise price, the gamma value of the option with one month remaining fluctuates considerably.
Gamma values are related to time and volatility.
Constructing such a position is fairly simple. In fact, only two steps are required: ① establish a gamma-neutral position, and then ② neutralize the delta position. Step 2 is always accomplished by operating the underlying (equivalent) shares or contract.
Using an at-the-money option position does not change the gamma value at all. Regardless of BTC or equivalent positions, their gamma value is zero
Neutrality of price changes is much more important for strategies that sell volatility. In the case of selling volatility, large moves in stock prices would be catastrophic. However, when buying volatility, large price movements can be helpful, so delta neutrality is generally sufficient as long as volatility risk is moderate. The Kelly System assumes that a fixed percentage of your bankroll is allocated to each bet. If you win money, the bet and bet size will increase; if you lose money, the Kelly system will automatically reduce the bet size due to the decrease in funds. To determine whether an option is "too expensive," you need to use volatility to measure the current option price. Not only do you need to compare the option's current implied volatility with the underlying's recent historical volatility, you also need to compare the current implied volatility with the near-term implied volatility. Most of the reasons why option buyers lose money are because they buy deeply out-of-the-money options.
16. [Conclusion]
Even if you read this book for the second time, it is still a tough nut to crack, but I still look forward to reading it again and again as the practical trading practice increases. I believe you will have different experiences.