No-Hype Option Trading

01/30/2013 6:00 am EST

Focus: OPTIONS

Kerry Given, PhD

Founder and Managing Director, Parkwood Capital LLC

Kerry Given talks about trading options in a no-hype manner that can lead to long term success and profits.

My guest today is Kerry Given.  We're talking about no-hype options Trading.  He's written a book about that, so we're going to talk about what's the no-hype part of it.  What is no-hype about options trading?

Hello Tim.  I guess the main point that I make in the book that I think is somewhat surprising to some people, I make the point that the long-term risk adjusted returns from any options strategy always tend toward zero and that surprises people because if you talk to an expert in options trading he will admit that that's true because probabilities are really what drive the pricing of options.  A lot of people don't realize that because they've been kind of led to believe that this is an easy way to make money or something like that. 

Alright, so if it's zero why do this at all then, or what keeps us on that positive side?

It means really that the secret of success in this game is how you manage the trade.  In other words, risk management.  If you manage the trade so that you minimize your losses then you can have a positive edge.

Alright, what does minimizing it mean, then, to minimize your loss or how do you manage it that way?

Well typically what you're doing is either hedging where you're putting on another position that cushions the movement one way or the other.  I mean, for example, if you have a trade that's bullish and tends to go up and that's your prediction, then if it started to turn against you, you might put a put on that would help hedge that on the bottom side.

Alright, so in your book you talk about how to have a realistic view of what to expect from options trading then?

Absolutely.  For each strategy, when I discuss it, I talk about how do you manage this trade and how do you manage the risk?  That turns out to be the critical factor.  That's what really makes the difference for this success factor for trading options.

Alright, you're also known as Dr. Duke.  Where did that come from?

Well I happened to be born on the same day as Prince Charles of England, so my dad thought that was cool and so he called me Duke, and in my family that's been a nickname ever since, and then when I got a PhD in chemistry it became Dr. Duke. 

Alright, so the PhD in chemistry I've been wanting to ask you about that as well.  How does that help you become a better trader?  Is there anything involved?  Any analogies you can make?

Well I would say the main thing if you're trained on the sciences or in engineering you're familiar with numbers, your good at math, and that turns out to be a good foundational skill in options trading because a lot of it is probability based.  It's really based on the math.

The interesting thing is I've heard that a lot of engineers and people who plug numbers in and get the same result each time have a tough time with trading because you can do the exact same trade again the next day and you have different results.  Does that drive you crazy as a scientist as well?

That's absolutely right, and in fact, I think engineers are maybe worse at that than scientists because scientists they find that theories don't always match the real world very well and so they are used to fuzziness, and engineers very often are used to a very precise world.

Alright, let's get back to book for one more question.  In terms of all the strategies you talk about is there one you could pick out that you think is the most popular that you've gotten the most response back on?

Probably the one that's the most popular that I hear a lot about and see a lot of people talking about these days is they are in condor, and basically in simple terms what you do is you put on a credit spread way above the index price and a credit spread way below, and as long as the index trades in between those two positions then you profit. 

How long should someone be in options before they try something like an iron condor?

Well I recommend that people go through a fair amount of training and then actually trade maybe just one or two contracts.  In other words trade very small so that your risk is very small and do that for several months because one of the things about our condor trading that sometimes people forget is if I trade it for six months I've only done it six times.  You wouldn't go to a surgeon that had only done the surgery six times.

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