Charles Cottle's educational material

I like Sheridan's stuff. It seems to be aimed more at the general market, though, while Cottle's is aimed at sophisticated investors looking to execute elaborate options strategies.

 

I have Cottle's book. I need to go over it again, as it doesn't all sink in the first time around.

 

I tend to agree. I had a look at his free 1 hr RD1 and RD3 video clips and it seems to me that one needs his diamonetrics grid and the excel dissector to get max value out of the course. However, one still needs to have a view on the market to decide what position to take albeit he shows you how to get the 'best' position for your point of view by removing the cloudiness associated with more complex strategies.
I get the impression that Sheridan's is more 'practical' in terms of when to enter and exit trades and how to adjust them (if at all).
In summary, Cottle is a lot harder to learn imho. I'm still reading his book trying to dissect his stuff for the third time, lol.
db

 

So what is the "Hidden Reality" about options? That it is difficult to make money with them if you don't get the direction of the underlying right? That liquidity sucks for most equity options, and thus bid/ask spreads are too wide? That writers of options tend to blow up? etc...

 

Cottle's material isn't easy the first time you are exposed to it, but it's worthwhile to learn. Understanding synthetics and dissections is a focus for Cottle, which is useful if you plan on trading options long term. He doesn't lay out a plan a-z to trade, rather teaches you how to understand the risks in your positions and how to visualize them from different vantage points, which may give you a different way to make adjustments.

I havn't taken Sheridan's course, but if his strategies are based on his cboe webinars, then he seems to focus on higher probability higher risk positions. It's worthwhile to learn different ways to trade and then decide what works best for you.

ST

 

LOL

Market Directions

O ya forgot about that

It never ceases to amaze me how 95% of options traders don't understand just how important Technical Analysis is having the right direction.

They teach you all this friggin nonsense about greeks and math and adjustments and blah blah blah but it all means shit if you can't dissect a chart correctly and understand bias.

 

<i>Here's an interview I did with Charles Cottle. it will give you a good overview of cottle, if you are not already familiar. i think he is extremely knowledgeable and on the cutting edge of derivative trading. </i>

Today, I had the pleasure to talk with world renowned option expert and innovator Charles Cottle. How are you today Charles?

Charles: I’m doing great, thank you Dave.

Dave: Let's start off by getting a bit of history about yourself. I know you have had tons of experience in and around the option markets. What first got you interested in options?

Charles: I was an accountant. I use to track the transactions of my clients and I got very interested in the workings of options. I then had the opportunity to visit a friend who was trading on the floor. This was an amazing new world that I never even knew existed, even though my office was just down the street for years. I worked at a family accounting firm during the summers. At this point, I was a year out of college and I visited the floor. Several of my friends were starting to trade futures. Futures did not attract me, but options seemed intriguing. It seemed like you really could control the risk. I went to a free seminar and came back to the office and said ‘I’m giving a years notice,’ to this family business of 65 years. Then I went down to become a trader.

Dave: Wow, that took some nerve leaving the security of the family office. We are talking about Chicago and the CBOE?

Charles: Correct.

Dave: What was your evolution on the floor? Did you start out as a clerk or did you step right into trading?

Charles: I stepped right into trading. I read a few books and figured I didn’t have to go that route. The market told me differently, because 6 months later I lost all my money. I just didn’t understand things. I thought when the customers were buying I could just take the other side and bet against them. I had no idea on how to take on an inventory of options. The other guys in the pits seemed to be so emotionless about every single trade they made. I was riding on every single contract that I had. I was basically hoping, praying and doing all the wrong things.

Dave: What was the path between being a losing trader and the thinkorswim brokerage launch?

Charles: There was a lot of in between. I went back to trading and I was a clerk for a while. I latched onto a fellow who was leaving his job. He was a Spread Hunter for some market makers on the floor. He wanted to become a market maker and needed to replace himself. I got the nod that he would train me. This is about the time that I was offered a job by someone who would eventually back the owners of thinkorswim. I turned that down because I was on a mission to learn everything that there was to know about options. I let Tom Sosnoff get the job, he now runs thinkorswim. We have had a very long friendship. At that point I went down to the Board of Trade to trade. I traded for many years and then Tony Saliba started The International Trading Institute and I wanted to take a breather in the late 80s, I decided to gallivant around Europe and when the new electronic exchanges were sprouting up, I started teaching market making in Europe. I wrote all the course material for The International Trading Institute and delivered all the content to the banks in Germany, Spain, Austria, and Denmark. That was about a five year tour of duty for me. Two of the years were in Europe, then I was in Madrid for four or five months, spent four or five months in Sweden and just had wonderful time. I learned a lot about electronic trading.

Dave: Is that the impetus for your book, Options---Perception and Deception and Coulda Woulda, Shoulda? Which by the way, I consider the best options book ever written.

Charles: Thank you. Yes, and for thinkorswim. I dreamt up the concept of thinkorswim after that whole journey, Tom came up with the name. I called Tom with the idea after waiting to hear from companies like E*Trade concerning my concept. Tom said, “Hey we can do that." But he was not anxious to build spreading into the platform. I insisted to build the spreading technology if he wanted me to come on board. I still have the email from 1999,about a year before we even started the business, saying “Though I am inclined to believe and agree with you that spreading is the way to go, the CBOE is going to have their one-year anniversary for the last time they had a spread. They are going to have that party next week.”

Dave: I hope he was joking. Tom can be a character!

Charles: Yes, It was a funny joke. However, I insisted and he said that we would build it. When we built it, we had built it before even I could accept an order. So the day they opened their doors electronically, we were firing spreads into the exchange! Today about 90% of thinkorswim business is spread orders.

Dave: Earlier you mentioned the term, Spread Hunter, can you explain to our members what this is?

Charles: Well, before all these computers that had software that scans the market to hunt down certain spread criteria, we had to manually pull them up to see if there were any good spreads in the market.

Dave: So you were actually looking for spreads to put on, not searching for existing spreads to knock out.

Charles: Exactly.

Dave: Many traders are scared of options, do you have any words of advice to someone just starting in options and learning the options language?

Charles: I agree with you. It is a scary thing, especially if someone doesn’t learn it properly. That is why in the first paragraph of both of my books it says, “Stay away from options.” Then in the second paragraph it says, “Oh, you are still here? You better educate yourself because there are a lot of things that can blindside you.” In my book there is more about losing money than there is about making money. The way that I go about teaching it is by a market makers standpoint. I found through revamping Options: Perception and Deception was a book for market makers into a retail product that we gave as the Think or Swim guide to options which is now available for download at www.riskdoctor.com at no cost. If you jump right into the last chapter of it, which in the new version is the first chapter, you will see an email dialogue for two months with somebody. A lot of the jargon and nomenclature addressed there in the normal conversation of email back and forth as I help this fellow manage his first electronic trade. To support that, the first chapter is called “Picking Up Where The Rest Leave Off: Synthetics.” It dives right into using synTools and boxTools. These synthetics are where the market makers can turn around the way they look at the position and understand it a whole lot better. For example, one of the first examples in the book is the covered write which is a very popular thing. You ask the same person who is excited about doing covered writes, “Would you sell naked puts?” The answer is ‘No.’ But you can prove to them, using these market-maker tools that I have assembled that have been used on the floor for decades, they see that it is exactly the same thing as a short put, penny for penny.

Dave: What exactly do you mean when you say 'synthetic?'

Charles: Well, it’s something that is equivalent to something else. You have a package of two different items that emulate or impersonate another one. For example, a long stock and a short call behave the same way as a short put. So if you have the long stock and the short call, and I had a short put, you and I would have the same future. We would have the same profit and loss outcome.

Dave: You are creating something by combining two or more things, mirroring the result. Am I understanding?

Charles: Yes, that is exactly right.

Dave: Let’s go a little deeper and look at several different market conditions and discuss which option strategy would work best for each condition.

Charles: That is the idea behind thinkorswim. The idea where you had to teach people about spreading because back then in the late 90s and early 2000, in that era, premiums were so high that you can only sell premium if you wanted to make money. But selling naked premium was prohibited from a risk and margin standpoint. The only thing else was to buy the option. Well, buying the option was prohibitive because it was too costly. So what’s left, Spreading. Limited risk, short premium is a very good way to consistently make money, but you have to have in your arsenal of tools that are able to take advantage of any market. Buying long premium, one usually has to be really right. It’s probably best to use a vertical in most situations.

Dave: Long premium is just betting on the stock going up with a call?

 

Charles: Well, that is one way, but you can also buy put premium. You can also buy straddle or strangle premium which is buying for both directions. You are buying a call and a put so you can take advantage of a move in either direction.

Dave: Many people reading may not know what you mean by 'vertical.' Please explain what you mean by this term.

Charles: Sure. A vertical is an option position composed of either all calls or all puts with long options and short options at two different strikes. The options are all on the same stock and of the same expiration, with the quantity of long options and quantity of short options netting to zero.

Dave: Would one use a vertical if they are bullish--or bearish on the stock?

Charles: Both. There are long call verticals—which is a bull spread created by buying a call and selling a call with a higher strike price. This is if you are bullish. If you are bearish on the stock, you want to use a short call vertical AKA bear spread. This is created by selling a call and buying a call at a higher strike price.

Dave: Can you explain the structure of a strangle and when one would use a strangle?

Charles: One should use a short strangle if the underlying is in a trading range and a long strangle if you expect a large move. A strangle is usually buying the first out of the money call and buying the first out of the money put. When you think the market is going to be flat, you want to benefit by selling the strangle. You want to buy a strangle that is further out so that you limit your exposure, so you have a defined risk. That would be called an iron condor for that particular position.

Dave: How do a strangle and straddle differ?

Charles: The strangle and straddle differ in one respect, they do not share the same strike. They both have the same theoretical profile today. For example, if we both got involved in a 45 day to go option, and you bought 10 strangles and I bought 7 straddles, we might have the exact same profit and loss for the next couple dollar moves in the stock. It starts to diverge as time goes by and the hard line, hockey stick risk profiles that you see in the textbooks takes hold. Today, that curvature is little like a little U. It would probably be identical with 7 versus 10. It depends on volatility, but it would be in the ballpark. In chapter 4 of my free downloadable book, it has a picture of both, side by side and it shows the two Us and it shows how they are practically identical today, the first day.

Dave: We talked about vertical bull and bear spreads earlier. Let's go a little deeper into these concepts.

Charles: They are the bread and butter of the industry. That is what a zero cost collar is and I Say this because there is a whole untapped market of people who don’t use options simply because they are dangerous, but you have to remember that options were invented for people who need them as opposed to greed them.

Dave: I like that, Charles--need them instead of greed them, clever !

Charles: Most of the users of options today are people who are greeding them and I don’t mean that in a negative way. I mean they are looking for strategies and plays. There is a whole untapped market of people who have stock, what about taking options and turning them into the same types of positions that options only strategy can achieve. That is what I call Hybrid Hedging which is the topic of my latest book which is yet to be published.

Dave: Do you have a title for your book?

Charles: Yes, it's called Hybrid Hedging in a Click. My dream is to someday have these unstandardized spreads come available in a single click. Certainly, with the market making capability of today versus yesteryear, where it is all electronic, we have auto-quoting functionality. The market makers just have their models all built into their platforms. So whenever an order comes in and it's overvalued they sell it. If it’s undervalued they buy it based on their own particular impression of value. They slightly differ from person to person, and they are scooping up all the inventory long and short and providing liquidity. So you can have all these formerly complicated strategies for the open outside market. It’s all done within a nanosecond now. My dream is to have brokerage firms and exchanges to allow for this one click functionality to give the people the ability to get on the complete hedge without the transactional cost / exposure of having to leg into them.

 

Dave: That is fantastic! Does the technology exist to build such a platform?

Charles: Yes, the market makers can accommodate this today. thinkorswim is the most advanced in spreading technology, however they have not got into the hybrid hedging side of things. I don’t believe they are intending to do so, but I don’t think it will be long. I think the market will drive it that way. You have 3 million accounts at some of these brokerage firms that are very profitable and productive. You can get a whole lot more customers by giving them the power to take control of their portfolios, rather than just crossing their fingers and hoping that we don’t have another few years like 2001 and 2002.

Dave: Speaking of hybrid hedging, I know you are well known for innovating a hybrid hedge called the Slingshot Hedge. What is a Slingshot Hedge and when is it used?

Charles: The slingshot hedge is one of about 40 of them. There is a free article explaining it at my website in the archive section. You can download the Slingshot hedge, it’s an 11 page paper. It is very simple. It comes from a guy who had 30,000 shares of Cisco. He called me and said he wanted a zero cost collar on it. Which isn’t a bad thing to do, but this is after Cisco had dropped from $82 a share all the way down to $8 a share and now rallied up and he had it the whole way. It rallied up to about $13 a share and he called me and said, “Look I want to buy the $12.50 put and sell the $15 call to hedge my stock.” Well, that makes it turn into a bull spread, a vertical. Which is fine but the thing is, he is giving up all his upside. If the stock doubles, he is maxed out at 15. I suggested to him, rather then give up your upside, instead of selling a call, why don’t you sell two call spreads against it to pay for your put. It didn’t have a name yet. One of the guys in the office came up with that name. Now I know that is selling twice as many call spreads . 15 and 17.50, at the time, were the strike, those proceeds will pay for the put and in the event that the stock takes off and goes to the moon, that bear spread that you sold will stop losing money. You can do this with what I call an OOS, an options only strategy, as appose to an AHHS, an advanced hybrid hedge strategy. The OOS and AHHS can be achieved whether you own the stock or not. So the OOS, the one that can impersonate this whole package, is easier to understand. Just like a simple butterfly, taking advantage of the stock resting between 13 and 16. It’s a 12.5, 15, 17.5 butterfly. So its maximum wing point is 15. The trick is, imbedded for the ride north, is the 17.5 call, just in case the stock takes off. So, Dave, can buy a butterfly and a call, and Charles can buy the stock and put protection and two calls spreads, and they both have the same future.

Dave: You mentioned there are 40 variations of this tactic?

Charles: Yes, another article on my website is about MRK. I put together a one pager about what it can do. It is a condor slingshot, so what it does is emulate a condor in a long call. The big shareholders never want to give up their upside, so that is the idea of the embedded call in these strategies. When you finance the purchase of a put by selling a call spread, you still have your upside intact. There is about 10 different variations of the slingshot. Some of them have extra wings on the foot side. I had a client, during the big decline in Microsoft and in AMAT make lots of money on the downside. As the market was going down he was more then happy because he had an extra put on the downside as the kicker. The slingshot hedge variations, and other variations on the website, show you how to make money in either direction. Then, what about the people who don’t want the extra kicker because they believe there is overhead resistance. They don’t think it’s worth having the embedded call. How can I hedge my stock and make it behave like a butterfly because I think it is going sideways? How can I make it behave like a condor? So there are all these hybrid hedges. My dream is in one click to have your stock behave like a butterfly now. It can be during a turbulent time, or in a time of uncertainty, and you just want a break from worrying about your portfolio. This thing will totally baby-sit it with limited risk application.

Dave: I sincerely wish you can develop your dream. It will really open up a new world for many traders. Unfortunately, we are almost out of time, is there anything you would like to leave our members with?

Charles: Yes, I would like to encourage them to come to some free webinars that I give. It goes over Coulda Woulda Shoulda every week on Wednesday. They need to have the hotcom functionality that they can get at hotcomm.com.

Dave: Now are these webinars free?

Charles: Yes, they are free and I go over Coulda Woulda Shoulda. We just finished the book and we are starting on chapter 1 next week on Wednesday at 5pm Eastern. It goes for one hour and people can ask questions. I then follow up with an illustrated and annotated transcript with all the past transcripts on my website. They can read and see how everything is illustrated. Some of the questions I got may not have fully been answered. For someone who is more experienced, they would be interested at 12 noon Chicago time, at the same location but a different chatroom, I do another webinar that is not free but is inexpensive, just the price of a lunch. That is following a live market and they can ask any questions. Right now we are working on hybrid strategies for Warren Buffets portfolio.

Dave: Charles it’s been great talking to you. Looking forward to chatting again soon.

Charles: Thank you, Dave.

 

Did anyone here ever established a long term/consistent winning strategy after reading a book(s) or attending seminar ?