The Ultimate Guide To Profitable Option Selling

PREDICTING ALPHA
The Ultimate Guide To Profitable

Option Selling
Copyright © 2023 by Predicting Alpha
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Contents
1 Why You Are Reading This Book 1

2 Confession: I Was A Trading Degen 4
3 The Moment That Everything Clicked 8
4 How The Rest Of This Book Is Organized 12
5 One Question To Know If You Are Profitable 14
6 Thinking Strategically About Strategy 19
7 The Fund Manager Method 23
8 Step 1: Generate An Opportunity Watch List 28
9 Step 2: Understand The News Driving
The Opportunity 31
10 Step 3: Gather The 3 Pieces Of The Fund
Manager Method... 35
11 The Reason We Do This: Calculating Our EDGE. 47
12 Reviewing the FMM Trade: $RPD (Rapid7 Inc) 52
13 Resources you’ll need to run the Fund
Manager Method... 60
1
Why You Are Reading This Book
If you are reading this book, it’s for one reason: You are trying
to make a lot of money trading options.
And because this is the book you picked up to help you in that
process, you are also someone who has realized two things:
1
THE ULTIMATE GUIDE TO PROFITABLE OPTION SELLING
This is something that honestly took me years to realize for

myself, years to actually implement for myself, and then another
year to codify into a process that others could learn from.
This book is the result of many years of work.
The thing that makes this book special is that it contains

information that you won’t find on any forum or other book.
In truth, it’s something that I was only able to learn for myself
because some very successful traders had a serious interest in
seeing me succeed.
Long story short, it’s the stuff that most authors keep behind
closed doors.
Before we move forward, let’s address the elephant in the room.
If the knowledge in this book is so valuable, why write a book about
2
WHY YOU ARE READING THIS BOOK
it, and why give it away for free?
The answer is pretty simple. The first thing is that at the end of
the day, the difference between good returns and great returns
using the fund manager method is your ability to be creative
and find unique opportunities through the methodology. The
second thing is that I am building a community of the top traders
and want you to be a part of it. But in order for you to find value
in the community (and add value too), you need to be brought
up to speed with how to become a profitable trader in the 21st
century.
What you will get by reading this book
• You will learn a 3 step process for finding and placing

excellent trades that have generated 7 figures in returns
for me and my friends in the last couple years.
• You will be able to think about trading like a professional
• You’ll learn how to use data to find inefficiencies without
needing to code
• Simply put, you will have the best shot at finding an edge
and beating the market.
3
2
Confession: I Was A Trading Degen
In 2017, I dipped my toes into the world of trading. My first

step was buying the S&P. That’s where my adventure began.
Things took a sharp turn when Canada made a big decision to
make marijuana legal. I saw an opportunity, invested in ACB
and Canopy Growth, and just like magic, my money grew by
200% in a short time. Thinking this would last forever, I dived
head first into the world of trading. I read everything I could
about technical analysis, studied people’s analysis on different
forums. I worked hard. But we all know how the story goes. Fast
forward 6 more months and I had lost more than half of my
money. I felt like the world was crashing down on me.
4
CONFESSION: I WAS A TRADING DEGEN
But guess what? Every cloud has a silver lining. A

friend introduced me to something that sounded like
a secret code……
Tada!
5
It’s a fancy term for using numbers and facts to decide what to
trade. I learned that this was the secret sauce of the big guys,
and that I had a real shot of winning if I could learn what they
knew.
My buddy and I decided to crack this code. We figured out that

data was really important to making good trading decisions, so
rolled up our sleeves and spent a year diving into the world of
options and learning to work with options and volatility data.
That year was tough, harder than anything we’d ever done, but
it completely changed my life.
The lessons we learned were like a treasure chest, helping us

make lots of money, and we weren’t alone. My friends joined in
on the success too. This new way of trading didn’t just change
how we made money; it changed everything for us. It opened
doors we never knew existed.
I want you to remember something though. I am not a profes-

sional trader. I have no formal education in finance. I am not a
data scientist. I didn’t work in a hedge fund or as an investment
banker. In reality, I’m just a retail trader who learned how to
make a buck.
6
CONFESSION: I WAS A TRADING DEGEN
Think of this book as a map that can take you to the

same destination I reached.
It isn’t about becoming rich overnight or selling you a dream.

It’s about showing you a path that I walked on, a path that made
a big difference in my life. And the best part? You don’t have
to walk alone. I can’t wait to see where your journey takes you.
Get ready for an adventure, and remember, every step you take
brings you closer to finding your own treasure.
7
3
The Moment That Everything Clicked
I went through this trading journey and I eventually got to a

point where I had a pretty good understanding of how to find
good trades, it was awesome how I could recognize a good trade
when someone else shared one.
But when I would go out and look for one myself, it always
seemed impossible. I would find a lead, start to do research,
but always hit a dead end. Oftentimes, these dead ends weren’t
even because it was a bad trade. The problem was that I knew
enough to stay away from the common traps that retail traders
fall into, but I was just short of taking my game to the next level.
I was trapped by my own analysis.
8
THE MOMENT THAT EVERYTHING CLICKED
I would be left asking myself questions like:
Do people really start from scratch every single time they

come up with a trade?
Are they actually that much more creative and analytical

than I am that I can’t even come close to what they do?
That was when I saw an in-depth walk through of one of my

friend’s trades, which changed the way I thought about trading
forever.
It was a trade analysis on TSLA. Long story short, the longer

dated options were overpriced and there was the opportunity
to make a lot of money selling them (and yes, a lot of money
was made). But what was really interesting (and led to a lot
more money being made) was that I finally saw the process that
professionals follow when pricing trades.
I had that “aha” moment I had been searching for over

the last 3 years.
What I learned through the in-depth breakdown was not de-

scribed to me as a step by step process to follow, rather it was
the logical steps that my mentor followed to be able to price the
trade and make a decision. It flowed almost like a story.
9
“OK, we have figured out a good reason that options might be

expensive here, so why don’t we take a look at the historical
volatility to see where it was before this spike..”
And so on, all the way to
The conclusion, which was my mentor literally saying:
“The market is pricing these options at $20, but they are really
worth $15”.
This was the moment that everything clicked for me.
I had already come to understand that trading has always been

about buying cheap and selling expensive. The hard part was
10
THE MOMENT THAT EVERYTHING CLICKED
knowing what was cheap and what was expensive!
But after seeing a professional think through an idea from start

to finish, the path from idea to execution became extremely
clear.
This book is going to teach you the methodology that

changed my trading forever.
I call it the Fund Manager Method.
The step by step process that took me from blindly yoloing my

money to turning my trading into a profitable business.
Now that you know a bit about how this all came to be, let’s jump
into the reason why you are here:
Learning how to find an edge.
11
4
How The Rest Of This Book Is Organized
The rest of this book focuses on this path.
This is a short book. It’s meant to get you from “I don’t know
what an edge looks like” to “I can place trades knowing I have
an edge” as quickly as possible.
It is divided into three sections.
The first section will give you the essentials that you need to
know in order for this methodology to make sense. These are
the fundamental truths about options and trading that we need
to understand before any trading strategy can be effective.
Part two will go over the fund manager method in depth and take
you through a real life example of using it to find an excellent
trade. At the end of this chapter, you will know how it works.
Part three provides you with links to all the resources you need
12
HOW THE REST OF THIS BOOK IS ORGANIZED
to use the fund manager method for your own trading.
Now that you know what to expect in the pages ahead, lets jump
right into it.
13
5
One Question To Know If You Are

Profitable
If so, you’ll make money in the long run, regardless of if you

have a winning or losing trade today.
If not, you’ll lose money in the long run, regardless of if you

have a winning or losing trade today.
14
ONE QUESTION TO KNOW IF YOU ARE PROFITABLE
Alright Sean, what are you talking about?
Let me explain.
One of the characteristics of trading that makes it challenging

is that in every strategy (profitable ones and unprofitable ones)
there is a lot of variance.
Pause. What is variance?
Over the long run, it’s not reasonable for us to expect our PnL
graphs to be beautiful straight lines from the bottom left of the
screen all the way to the top right. It’d be nice… but it’s not going
to happen, unfortunately.
Instead, our PnL is filled with periods of making money, losing

money, and not much happening at all.
Even if we have an extremely profitable strategy, we will see

moves up and down. This is because we are making money for
holding risk.
Think about it like you are running a car insurance company.

Insurance is one of the most profitable businesses in the world,
so congratulations for getting into this space. You are going to
make a lot of money. But in the end of the day, if there were
never any car crashes, no one would buy insurance.
Every day you are collecting premiums from drivers. Once in a

while, you will have to pay out a large amount because someone
crashed their car. Should you be worried about this? No! You
15
expect this to happen. This “move down” in your PnL is a part of

your variance in the winning game you are playing.
Variance can also work against you though, tricking you into
thinking you are playing a winning game. For example, if you
go to the casino with some friends and make $10,000 playing
roulette, should you quit your full time job to play roulette full
time? No! Because we know that you are supposed to lose money
playing roulette, and that over time you will even if you made
money today (otherwise the casino would not have a business).
The move up you experienced is a part of your variance in the losing
game you are playing.
This trading characteristic (variance) comes with a pro and a

con.
• Pro: Losing money today doesn’t mean you have a bad

strategy
• Con: Making money today doesn’t mean you have a good
strategy.
Take this chart, for example:
16
ONE QUESTION TO KNOW IF YOU ARE PROFITABLE
This is a price chart for a stock. Imagine this was your entire
portfolio holdings.
If this were your strategy, you’d be concerned, right? In just one

month, there is almost a 10% draw-down!
But if we zoom out and look at a long time frame..
17
WOW! Not bad performance. (It’s the S&P).
18
6
Thinking Strategically About Strategy
Even when you put in a lot of work and have the utmost
confidence in an idea, you can still lose money on it. However,
that doesn’t mean it was a bad idea, or that you shouldn’t take
similar trades in the future.
If your analysis was as good as you believe it to be, taking those

trades over and over again into the future could be extremely
lucrative, even though there are some losers.
In order to see beyond our one trade, we need to be thinking
in terms of the expected value of our strategy.
19
What is expected value?
Expected value is a betting concept that helps us answer this

question:
“If I were to take this bet/trade over and over again into the future,
how much money will I make or lose?”
It is how professional traders look at their trades, because it
allows them to quickly and easily assess whether the trade they
are looking at is worth taking.
We always want to be taking trades that have a positive
expected value. A positive expected value tells us that a trade,
on average, has a profitable return. And if we keep taking that
bet again and again into the future, the average return per trade
(total return divided by total bets placed) should be our expected
value.
20
THINKING STRATEGICALLY ABOUT STRATEGY
How can we increase our expected value?
This question led me on the journey to build a methodology for

pricing options. And truthfully, it’s the only question that I
really care about when it comes to trading. I’m here to make
money. How can I make more of it, faster?
No matter what angle you look at it from, increasing your

expected value, and making money trading boils down to one
thing: finding an edge.
What is an edge?
Okay, so you’re wondering, “What’s an edge in trading?” Well,

let’s take a little journey together and unravel this mystery.
Imagine you’re an electrician in a small town. There’s this other

guy who’s the go-to person for all electrical fixes. Now, if you
find some kind of advantage that makes you better than him
- like getting jobs done faster or having better prices - boom,
you’ve got yourself an edge! That’s how trading works too. You
don’t need to come up with a super complicated plan; you just
need to be a bit better than the rest.
That’s why the Fund Manager Method is so powerful.
It’s the step by step guide to conceptualize and quantify your

trading edge, so that you can take trading with high positive
expected value (aka: trades that make you money).
21
In trading, the end result is pretty straightforward: Buy X, sell

Y. The entire process leading up to those decisions is where the
magic happens and where your edge can be found.
Alright, enough theory.
At this point, you should have a decent enough

understanding of the following:
• Sean definitely blew up his first account swing trading weed

stocks
• Quantitative trading is how you make money
• Professional traders only care one thing: having the highest
expected value possible
• To have positive (and increase) your expected value, you
need to have an edge.
• An edge is a tangible reason that you deserve to get paid over
the next guy
• The fund manager method will give you an edge when
analyzing option trades.
Now, lets actually go over the method.
22
7
The Fund Manager Method
Disclaimer: As you read through this section, it’s going to feel

like a lot of work to do this. But in reality, once you understand
this process, finding and analyzing trades is easy.
Because when you boil it down..
It’s actually simple.
For any ticker, you can create a highly accurate forecast of future
option prices using the following formula
Option price = (absolute valuation + relative valuation + Vol

Forecast) / 3
23
The reason this is so valuable is that every option has an implied

volatility and a price that it is trading at. This is literally the price
set by the market. The outcome of the fund manager method is
our own implied volatility number and option price.
Pause: A quick note about volatility.
Volatility is one of the most important concepts we need to

understand as option traders. The reason? Options are volatility
products. What this means is that we are not just concerned
with what direction a stock move, but also how much it moves.
Professional option traders look at options in terms of how much
volatility they are implying in the future because it’s the most
important consideration when finding trades.
Implied volatility is how much the market is implying the stock

to move in the future. Realized volatility is how much it actually
moves. Our forecast of volatility is how much we expect it
24
THE FUND MANAGER METHOD
to move (This is what the FMM helps us do!). The difference

between the implied volatility and our forecast is our edge (the
reason we are making money).
OK, back to the analysis.
At the end of these steps we will literally find ourselves saying

something like:
“The market says this straddle is worth $10. It should be trading for
$5. Sell!”
Remember this chart?
Now you are probably thinking
“This is cool, I sort of understood every word in that equation Sean

shared… Now how do I actually use it?”
25
Yeah, I get that. I felt the same way until someone literally broke
it down for me like I was 5 (I had a good mentor).
In order to be able to turn the FMM formula into a

trade finding machine, these are the steps we will
follow.
1. Generate a watch list with trading opportunities (You

weren’t going to do this for 5,000 equities… right?)
2. Use the news to see if there is a logical reason why volatility
should be mispriced
3. Gather the pieces of our option pricing model
• Find the average historical option price (absolute valuation)

• Find the option price that closes the gap with correlated
companies (Relative valuation)
• Look at the Predicting Alpha volatility forecast (Vol forecast)
4. Take the average of these four and use that as our fair value
of volatility
Once we have our fair value, trading becomes extremely easy.
“The options are trading lower than our fair value” -> buy them.
“The options are trading higher than our fair value” -> sell them.
I’m going to walk you through each of these steps using a trade
example since that’s probably the easiest way to learn the Fund
26
THE FUND MANAGER METHOD
Manager Method (it’s how I learned it too).
As we go, keep in mind that this process can be replicated to

analyze the options for any ticker. The numbers you see and
the trade you end up finding will be different, but the procedure
remains the same.
NOTE: For the purposes of this analysis, we are going to focus

on 30dte options. The same analysis can be used for different
expirations.
27
8
Step 1: Generate An Opportunity

Watch List
Imagine you are on your way to the mall to buy a shirt. You know
exactly what kind of shirt you want to buy, but you aren’t sure
what store it is in.
Most people would simply go store by store looking to see if

there is a shirt that matches their criteria.
What could have been a 5 minute trip to the mall has turned into
an annoying 2 hour search just to find out they have it but at a
location in another mall. Cool.
This is how most people trade. Even if they have a good idea
of what to trade, they wander around the market looking for
something that is a good fit. There was a point in time where
this was the way to do it, back in the 1980s or so… but now we
have computers.
Going back to the shopping example, imagine how different that
28
STEP 1: GENERATE AN OPPORTUNITY WATCH LIST
shopping trip would be if you walked into the mall and there
was a screen that asked you: “What are you looking for?”
“I’m looking for a shirt with X type of collar, Y, type of material,

in Z size. Then I want to sort them so I see the cheapest ones
first”
It’s already pretty clear how much time you save and how much
stress you avoid experiencing.
This is basically what we are doing when we generate our trading

watch list. The tool we use for this is referred to as a scanner.
Here is the criteria that I typically start with when looking for
trades (note: I am usually looking for overpriced options to sell).
Every day when I look for trades, I am no longer looking at

the entire market. What starts off as thousands of tickers are
29
immediately narrowed down to about 50 opportunities for me

to dive deep into.
What would have taken me days now takes me seconds.
Why is this important to me? Because I signed up to trade to

make as much money as possible, as quickly as possible. Not to
stare at charts for 14 hours a day until I die.
Anyways, this is the starting point for me every day. I have about
5 preset scans that I use to look for very specific opportunities
in the market. As I go through my scans, I highlight the ones
that show the most promise (usually about 5) and those become
the ones that I explore further.
On to the next step!
30
9
Step 2: Understand The News Driving

The Opportunity
Something that it took me a while to appreciate is that markets

are pretty smart. Actually, they are really smart. Annoyingly
smart. So the only time that really great opportunities are found
is when:
31
Obviously in situation A, things are pretty straightforward. We

don’t need to spend much time here. But in situation B, we could
use some clarification. Also, unless you’re an insider, Situation
B is the one that we are likely to find ourselves in most of the
time (don’t worry, there’s still lambo money to be made).
Situation B is the likely reason that stocks are showing up on

our FMM watch list from step 1.
When looking at the news, we are really trying to answer one

question:
If so, then we can move on to the next step. If not, then we need
to be very cautious. If something looks mispriced, and we can’t
identify a reason why it might be mispriced, then someone might
know something we don’t. This is something we want to avoid
(unless you are feeling charitable and would like to donate to
Wall Street).
Here is a list of reasons options could be mispriced (typically,

expensive):
32
STEP 2: UNDERSTAND THE NEWS DRIVING THE OPPORTUNITY
This is the “qualitative” side of the trade. The reasoning that

complements the data analysis we will do.
“These options are $5 too expensive, and the reason is because XYZ.”
This is the XYZ.
A lot of traders get caught up on this step. I think it’s fair to spend
some time trying to understand why something is mispriced,
but the reality is: It’s usually pretty obvious. What do you think
is causing something to have a risk premium? That’s probably
what it is.
33
34
10
Step 3: Gather The 3 Pieces Of The

Fund Manager Method Analysis
OK this step is going to be critical. Let’s recall what our formula

is.
This formula is going to be the game changer. At this point

we have already identified a stock where there should be a
35
mispricing. Now if we can calculate the fair value, we can find

the stocks with the biggest edge, trade those, and retire on the
beach, drinking mojitos or something.
No we’ll go over each input and break it down so you can actually
do this.
The first input: Absolute valuation
Let’s compare the current option prices/implied volatility to the

past.
There are 3 questions that we are going to answer, and one

chart that we need to do it
1. What is the current risk premium?

2. What is the average risk premium?
3. What would the implied volatility need to change by in
order to make the current risk premium equal to the
average risk premium?
Let’s do an example so you can understand how we calculate

our first input. The chart below is the risk premium for RPD,
the company we are using in our analysis. We can see that
the current option prices are 1.32x higher than the amount of
volatility we are actually seeing. This means there is a 32%
premium. (question one answered!)
36
STEP 3: GATHER THE 3 PIECES OF THE FUND MANAGER METHOD...
Using the table below, we can see that the average (mean) risk
premium is 1.019 (question 2 answered!)
Now we just need to ask:
What does the implied volatility for the stock need to

change by to make the current risk premium (the answer
to question 1) equal the average risk premium (the answer
37
to question 2).
Here is the calculation to get the answer to question 3.
AvgIVRVratio = (iv-x)/rv
1.019 = (83.11-x)/63.18
64.38 = 83.11 - x
18.73 = x
Therefore, the IV to make the current ratio equal to the average

ratio is 83.11 - 18.73 = 64.38%
And there we have it. Our first input! The absolute valuation
answer is 64.83%.
38
Now it is time to calculate our second input, which is the

relative valuation.
The idea behind relative valuation is this:
If you look at two companies that are very similar, you will notice
that they trade in a similar fashion. For example, let’s look at
KO (Coca Cola) and PEP (Pepsi).
This is the price chart for each company. As you can see, when
one goes up, so does the other. When one goes down, the other
tends to do the same.
Since the price action for them is correlated, the option prices
should move similarly too.
39
Here are the premiums for KO and PEP, and as expected, they
move very similarly to each other. Something else we can see is
that every time the spread opens up, it always closes!
This is the basis for what we call relative value trading, and it is
something we can leverage to help determine the fair value of
options!
Here’s what we do:
1. Find a correlated company.

2. Compare it’s premium to the premium of the company we
are analyzing
3. Calculate what the IV of the company we are analyzing
needs to be to bring it back in line with the premium of the
correlated company
In a way this is similar to the first value we calculated. We are

using the correlated company as the benchmark and seeing how
we need to adjust the current company to bring it back into its
“normal” range.
So let’s actually do this!
First, let’s find a company correlated with RPD.
40
I was able to quickly find correlated companies using a correla-

tion scanner. There doesn’t seem to be a company that is ultra
correlated with RPD, but my threshold is usually 0.6, which
means there are 3 companies that we could potentially use.
To pick between them, I will quickly look at the premiums for

each to see which moves the most similarly.
The company that I chose was NEWR, the second most corre-
lated company.
The reason is because when I looked at the premium time series

for the different companies, NEWR was the one that was most
correlated (in option terms).
41
RPD and NEWR Premiums. NEWR is the ticker with the highest
premium correlation to RPD recently.
Looking at the spread for RPD and NEWR, we can see that there
was a sharp decrease in both.
However, the drop was greater in NEWR than RPD.
Something to remember here is that we are doing this analysis

on the assumption that RPD is the inefficient stock. That’s why we
are going to use NEWR as the benchmark for where RPD should
be. (If you want to get really fancy with it, you could potentially
42
use NEWR as a hedge for RPD, but that is a whole other can of
worms that we don’t need to open today).
Alright! So now we have our benchmark at 0.95.
Using the same formula as last time, let’s calculate what the IV
should be on RPD in order to make it in line with the premium
on NEWR.
NEWR IVRVratio = (iv-x)/rv

0.95 = (83.11-x)/63.18
60.02 = 83.11 - x
23.08 = x
Therefore, the IV to make the current ratio for RPD equal to the
ratio for NEWR is 83.11 - 23.08 = 60.03
And there we have it. Our second input! The relative valuation
answer is 60.03%.
43
Let’s calculate our third input, which is the Predicting

Alpha Forecast.
The last piece of the puzzle that we are going to include is simply
a blend of realized and implied volatility. The reason we do this
is that the market is pretty smart (so implied volatility is usually
a decently fair value for an option) and we need to consider the
way a stock is actually moving right now (the realized volatility).
The easiest way to do this is by building a forecast that combines

the two. This requires a little bit of computer wizardry (just the
like the rest of it) so we just added this number for you into the
PA terminal.
So this is actually a really easy thing to do.
To calculate this number, I just look at it.
44
For RPD the number is 53.74%.
45
46
11
The Reason We Do This: Calculating

Our EDGE.
We are done.
We now have our third and final piece in our equation.
So guess what? Now is the exciting moment that we bring all of

these pieces together and calculate our fair value for the options!
The way that we do this is by taking an average of all of our

“forecasts”. This is called an ensemble model.
Basically, each of the things we calculated have some predictive

power. AKA, they are each decent forecasts for future option
prices. But by combining them, we get an even more accurate
forecast because we are combining all of them into one.
Let’s do that now and see what the final answer is:
47
When we combined all of our data, the forecast for the fair value
of RPD’s options is 59.53% IV.
There we have it. The number we have all been waiting for. The
number that will make us money.
Using a simple calculator we can convert this number into

dollars.
48
THE REASON WE DO THIS: CALCULATING OUR EDGE.
If our forecast is correct, the straddle for RPD at the $50 strike
should be trading for about $7.37.
Let’s go to our broker and see what it is currently being priced

at..
$9.90. Nine, almost TEN dollars.
49
That is a $250 profit per straddle on average (remember, this is

our expected value).
We can now say the sentence that every trader (who wants/does
make money) says:
“The market is pricing RPD 30DTE options at $9.90. We

forecast it to be worth $7.37. We expect to make $2.53 on
this trade”.
Take a second to take in where we started at the beginning of this

book and where are now. This is some serious stuff. Powerful
stuff. We actually have an idea of the value of the product we are
trading.
We are trading like professionals.
50
THE REASON WE DO THIS: CALCULATING OUR EDGE.
Imagine building an entire portfolio of trades like this.
Imagine taking this analysis and combining it with some in-

dustry specific expertise you possess. Or using it specifically to
trade against retail. Are you feeling the same excitement that I
did when I cracked this code? Because it was pretty much at this
moment that everything clicked for me, and I hope it’s clicking
for you too.
When you are able to do an analysis like this you can actually
build real confidence in a trade. For the rational trader, this is
what allows you to scale up while sleeping better at night. Or if
you are a pure degen, this type of analysis can point you in the
best place to yolo your student loan.
51
12
Reviewing the FMM Trade: $RPD

(Rapid7 Inc)
In the previous chapters we went over the Fund Manager Method

using a trade example on the ticker $RPD.
We found this trade using our Expensive Options Scanner which

allowed us to quickly filter the entire market for opportunities
to sell options.
We used a combination of absolute and relative valuations to

price the volatility. In the end, we used option pricing calculators
to determine that the Jun 16th straddle, which was trading for
$9.90, had a fair value around $7.37.
52
REVIEWING THE FMM TRADE: $RPD (RAPID7 INC)
So.. how did this trade play out?
Well at the time of writing this chapter, it is Jun 1st, 2023.
The Jun 16 $50 straddle on $RPD is going for $6.65 (Fill price).
This is what the straddle was trading for at the time of closing
This means we netted a profit of roughly $3.25, or

$325 per straddle sold.
This is what our PnL looked like at the time of closing.
53
This trade was extremely profitable.
But wait: In the analysis you said that the fair value is
$7.37. Since you closed for less than that, doesn’t it
mean your analysis was wrong?
Not exactly. Here’s why.
The $7.37 fair value price that we calculated is what we believe it

should be trade at. But at the time of our calculation, the straddle
was trading for $9.90. Between the time we put on the trade and
closed it, the price fluctuated around our fair value. In the end,
we closed for a price lower than our fair value.
The important thing to remember about our fair value calcula-
54
tion is that the option doesn’t need to trade at that exact price
for our trade to be profitable. We’re believing on average the
options would be trading at the $7.37 price.
The $2.53 profit we anticipated to make? That’s our

expected value!
Remember this graph:
On any given trade, our PnL will likely be higher or lower than
the expected value we calculate. However, as we increase the
number of trades, we will start to move towards that expected
value number as the average return per trade.
So if we were to do 1,000 trades like this on $RPD in the same
55
scenario, we would expect to make $2.73 on average. If we look

at any individual trade, we could make more, make less, or even
lose money. But by consistently taking trades with positive
expectancy, we should earn a significant return on our portfolio.
Did we hedge the trade?
For this trade, we didn’t need to do any hedging. Sometimes

when you’re placing option trades you’ll need to hedge your
deltas: for example, if the share price begins to trend.
On this trade, even though we saw a slight increase in realized

volatility, the share price continued to chop around near our
strike price.
56
The IV stayed higher than the RV for $RPD
And the share price remained close to our $50 strikes
57
Why did we close the trade?
The reason we chose to close the trade at this time is the spread
between implied and realized volatility was closing. Partially
because implied volatility increase a bit, but primarily because
implied volatility came down so much.
Could we continue to hold and potentially collect more of the

premium?
Yes.
Is this the right move? It’s debatable.
I’ll put it like this: if I didn’t have other trades that I wanted to
put on, I may have kept this trade open to try and extract more
value from the position.
But here is the beauty of having powerful scanners and a

thorough process for evaluating trades:
There were better trades to be in.
So by closing out this trade, I increase my available margin,

giving myself the opportunity to enter trades that have a bigger
edge.
That’s how trading goes. You find good trades, you get into them,
you close when you’re right or wrong, and then you reallocate
your capital into new opportunities.
58
Remember: we are trading to make as much money as possible,

as quickly as possible. This means as better opportunities arise,
you want to have the fire power available to take advantage of
them.
It was a great trade. Now it’s on to the next one!
59
13
Resources you’ll need to run the Fund

Manager Method Analysis
So what now?
Alright, so here’s the deal. If you have made it this far then
you gotta think there’s something to this analysis. But you are
also probably thinking “How the f&*k do I actually put this into
practice?”
It’s no secret, we run a platform specifically designed to analyze

trades like this.
This E book has been (not so subtly) designed in part as a means

to try to sell you on it.
That being said, we don’t want to limit anyone from piecing

together some quasi-dashboard using different tools around
the internet.
60
RESOURCES YOU’LL NEED TO RUN THE FUND MANAGER METHOD...
Here’s the resources you will need to do it.
1. You can use your brokerage for basic watch lists, news,
and visualizations of volatility
In your brokerage you will be able to build out a simple scanner

that you can use to generate a watch list. You will be pretty
limited with what you can do but something like IV rank can get
you started on the right track.
Most brokerages will also allow you to visualize historical

implied volatility and realized volatility. You can pull this data
into an Excel spreadsheet to build out the premium time series,
calculate the averages, etc. This will allow you to do the absolute
valuation.
There is also a section where you can see stock specific news.
This will be how you figure out the “qualitative reason” that the
inefficiency exists.
61
2. You will need a data vendor to provide you with more

specific information so you can do the relative value
calculations
Here are two vendors that you could look into using:
https://orats.com/
https://polygon.io/options
Once you have this data, you will need to use it to generate the
relative value comparisons and correlation finders so that you
can do the (extremely important) relative value steps. You will
also be able to create your own volatility forecasts (similar to
the PA forecast of volatility).
3. Option price calculators
You will need a calculator so that you can figure out how big the
edge is and what price you should be entering and exiting the
trades for. Here is a free calculator that you can use to do this
https://www.optionseducation.org/toolsoptionquotes/option
scalculator
62
The Alternative: Predicting Alpha (our platform)
In 2020 my friend and I created a platform with the hopes of

aggregating these resources into a one-stop-shop for retail
option traders.
Since then, it’s grown into great community, home to some of

the smartest traders we know.
By joining Predicting Alpha, you will not only gain access to

the necessary data for identifying profitable trades but also
receive the education required to successfully transition into
a quantitative-style trader.
You can sign up for free today and immediately get:
• 150 hours of education

• Our trading dashboard which helps you find and analyze
profitable trades
• 6 months of 1on1 coaching to make sure you find your edge
• Access to our network of traders who learn and collaborate
on ideas together.
Here’s what just a few members say about their experience with
us:
Simply amazing. I was so lucky I stumbled upon these
63
guys. They teach you everything you need to become a

winner. From access to institutional data to 1 on 1’s they
teach you to be a real professional trader and make money
in the markets.
Steven B.
Thanks to Predicting Alpha, I now understand how to

price options, how to find inefficiencies, and I have all
the tools and support I need to build an alpha generating
portfolio.
I always knew that if I had professional data and educa-

tion, I would not be doing technical analysis. I knew that
if I wanted to outperform the market, I would need an
edge. Predicting Alpha gave me that alternative I needed
for a price I could afford.
Warren G.
These guys know their stuff. In a world of internet gurus

and all around bad information as far as investing and
trading, these guys stand apart. They have a mission to
help retail investors and traders get the right information
and make the right decisions. If you’re looking for data
driven trading decisions, an accepting community, and
accessible instructors at all levels of options trading; these
are your guys.
64
Josh H
So yea. We’re building a community of 1,000 traders who will

have the winning toolkit and network.
There’s a free trial with full access to the tools, education and
community. So when the time is right..
www.predictingalpha.com/start-now
Just click it and join for free.
If you do, I’ll see you on our first coaching call (what, you
thought I was going to leave you hanging?).
If not, I hope this book has opened your eyes to what is possible
in the world of trading.
This game is so much fun. It’s an absolute thrill and there are
big rewards.
What the hell are you waiting for? Put this PDF in that folder
of stuff you want to revisit but never do, go out there, and find
your edge!
Sean Ryan
CEO, Predicting Alpha
PS. you can email me
65
sean@predictingalpha.com
Alright see ya around
66

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PREDICTING ALPHA

The Ultimate Guide To Profitable

All rights reserved. No part of this publication may be

Predicting Alpha asserts the moral right to be identified as the

Predicting Alpha has no responsibility for the persistence or

This book was professionally typeset on Reedsy.

1 Why You Are Reading This Book 1

Why You Are Reading This Book

This is something that honestly took me years to realize for

This book is the result of many years of work.

The thing that makes this book special is that it contains

Before we move forward, let’s address the elephant in the room.

If the knowledge in this book is so valuable, why write a book about

it, and why give it away for free?

What you will get by reading this book

• You will learn a 3 step process for finding and placing

Confession: I Was A Trading Degen

In 2017, I dipped my toes into the world of trading. My first

But guess what? Every cloud has a silver lining. A

My buddy and I decided to crack this code. We figured out that

The lessons we learned were like a treasure chest, helping us

I want you to remember something though. I am not a profes-

Think of this book as a map that can take you to the

It isn’t about becoming rich overnight or selling you a dream.

The Moment That Everything Clicked

I went through this trading journey and I eventually got to a

I was trapped by my own analysis.

I would be left asking myself questions like:

Do people really start from scratch every single time they

Are they actually that much more creative and analytical

That was when I saw an in-depth walk through of one of my

It was a trade analysis on TSLA. Long story short, the longer

I had that “aha” moment I had been searching for over

What I learned through the in-depth breakdown was not de-

“OK, we have figured out a good reason that options might be

And so on, all the way to

The conclusion, which was my mentor literally saying:

This was the moment that everything clicked for me.

I had already come to understand that trading has always been

knowing what was cheap and what was expensive!

But after seeing a professional think through an idea from start

This book is going to teach you the methodology that

I call it the Fund Manager Method.

The step by step process that took me from blindly yoloing my

Learning how to find an edge.

How The Rest Of This Book Is Organized

The rest of this book focuses on this path.

It is divided into three sections.

to use the fund manager method for your own trading.

One Question To Know If You Are

If so, you’ll make money in the long run, regardless of if you

If not, you’ll lose money in the long run, regardless of if you

Alright Sean, what are you talking about?

One of the characteristics of trading that makes it challenging

Pause. What is variance?

Instead, our PnL is filled with periods of making money, losing

Even if we have an extremely profitable strategy, we will see

Think about it like you are running a car insurance company.