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The Option Trader’s Hedge Fund: A Business Framework for Trading Equity and Index Options by Mark Sebastian, Dennis A. Chen

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1. The Insurance Business

In this chapter we show you how to create a business of trading options successfully by using the framework of an insurance company. This is the same framework used at a hedge fund managed by Dennis (the co-author of this book). So, for this book, we create the concept of The One Man Insurance Company (TOMIC). You will need to know how the insurance business works. What is the good, the bad, and the ugly of the insurance business? How does an insurance company make money? How does it lose money? What are the key profit drivers of the business, and what are the key success factors?

Insurance is the equitable transfer of risk from one entity to another in exchange for compensation, called a premium. The insurance companies ...

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