Contents

Cover Page

Half Title page

Series

Title Page

Copyright

Acknowledgments

Element Key

Introduction

Chapter 1: Strategies in Volatile Markets: Uncertainty as an Advantage

AVOIDING 10 COMMON MISTAKES

MODIFYING YOUR RISK TOLERANCE

THE NATURE OF MARKET VOLATILITY

MARKET VOLATILITY RISK

OPTIONS IN THE VOLATILE ENVIRONMENT

Chapter 2: Combinations and Spreads: Creative Risk Management

OVERVIEW OF ADVANCED STRATEGIES

VERTICAL SPREAD STRATEGIES

HORIZONTAL AND DIAGONAL SPREAD STRATEGIES

ALTERING SPREAD PATTERNS

Chapter 3: Hedges and Straddles: More Creativity

THE TWO TYPES OF HEDGES

HEDGING OPTION POSITIONS

STRADDLE STRATEGIES

THEORY AND PRACTICE OF COMBINED TECHNIQUES

Chapter 4: Options for Specialized Trading: Leveraging the Technical Approach

SWING-TRADING BASICS

THE SETUP SIGNAL

TESTING THE THEORY

A STRATEGIC VIEW OF OPTIONS FOR SWING TRADING

OPTIONS USED FOR OTHER TRADING STRATEGIES

SWING- AND DAY-TRADING ADVANCED STRATEGIES

Chapter 5: Options on Futures: Leveraging Your Leverage

IMPORTANT DISTINCTIONS

REGULATORY DIFFERENCES

Chapter 6: Trading Index Options: Playing the Broader Market

ADVANTAGES TO TRADING INDEX OPTIONS

EXERCISE AND EXPIRATION RULES

INDEX OPTION STRATEGIES

STRUCTURED INDEX OPTIONS

Chapter 7: Synthetic Positions: Tracking the Stock

SYNTHETIC PUT (PROTECTED SHORT SALE)

SYNTHETIC LONG CALL (INSURANCE PUT OR MARRIED PUT)

SYNTHETIC LONG STOCK

SYNTHETIC SHORT STOCK

SPLIT STRIKE STRATEGY (BULLISH)

SPLIT STRIKE STRATEGY (BEARISH)

COLLARS

SYNTHETIC STRADDLES

Chapter 8: Risk: Rules of the Game

IDENTIFYING THE RANGE OF RISK

EVALUATING YOUR RISK TOLERANCE

Chapter 9: Taxes: The Wild Card of Options Trading

QUALIFIED COVERED CALLS—SPECIAL RULES

LOOKING TO THE FUTURE

Chapter 10: Choosing Stocks: Finding the Right Ingredients

DEVELOPING AN ACTION PLAN

SELECTING STOCKS FOR CALL WRITING

AVERAGING YOUR COST

ANALYZING STOCKS

APPLYING ANALYSIS TO CALLS—THE “GREEKS”

ACTING ON GOOD INFORMATION

Glossary

Recommended Reading

About the Author

Index

GETTING STARTED IN
ADVANCED
OPTIONS
ILLUSTRATED EDITION

BOOKS IN THE GETTING STARTED IN SERIES

Getting Started in Currency Trading, Third Edition by Michael D. Archer

Getting Started in Forex Trading Strategies by Michael D. Archer

Getting Started in Asset Allocation by Bill Bresnan and Eric P. Gelb

Getting Started in Chart Patterns by Thomas N. Bulkowski

Getting Started in Internet Auctions by Alan Elliott

Getting Started in Mutual Funds, Second Edition by Alvin D. Hall

Getting Started in Stocks by Alvin D. Hall

Getting Started in Estate Planning by Kerry Hannon

Getting Started in a Financially Secure Retirement by Henry Hebeler

Getting Started in Online Personal Finance by Brad Hill

Getting Started in REITs by Richard Imperiale

Getting Started in Rebuilding Your 401(k), Second Edition by Paul Katzeff

Getting Started in Security Analysis by Peter J. Klein

Getting Started in Global Investing by Robert P. Kreitler

Getting Started in ETFs by Todd K. Lofton

Getting Started in Futures, Fifth Edition by Todd Lofton

Getting Started in Candlestick Charting by Tina Logan

Getting Started in Project Management by Paula Martin and Karen Tate

Getting Started in Value Investing by Charles Mizrahi

Getting Started in Financial Information by Daniel Moreau and Tracey Longo

Getting Started in Emerging Markets by Christopher Poillon

Getting Started in Technical Analysis by Jack D. Schwager

Getting Started in Hedge Funds, Third Edition by Daniel A. Strachman

Getting Started in Fundamental Analysis by Michael C. Thomsett

Getting Started in Options, Eighth Edition by Michael C. Thomsett

Getting Started in Options, Illustrated Edition by Michael C. Thomsett

Getting Started in Real Estate Investing, Third Edition by Michael C. Thomsett

Getting Started in Rental Income by Michael C. Thomsett

Getting Started in Six Sigma by Michael C. Thomsett

Getting Started in Stock Investing and Trading by Michael C. Thomsett

Getting Started in Stock Investing and Trading, Illustrated Edition by Michael C. Thomsett

Getting Started in Swing Trading by Michael C. Thomsett

Getting Started in Annuities by Gordon M. Williamson

Getting Started in Bonds, Second Edition by Sharon Saltzgiver Wright

Getting Started in Retirement Planning by Ronald M. Yolles and Murray Yolles

Copyright © 2014 by Michael C. Thomsett.

Published by John Wiley & Sons Singapore Pte. Ltd.
1 Fusionopolis Walk, #07-01, Solaris South Tower, Singapore 138628

All rights reserved.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as expressly permitted by law, without either the prior written permission of the Publisher, or authorization through payment of the appropriate photocopy fee to the Copyright Clearance Center. Requests for permission should be addressed to the Publisher, John Wiley & Sons Singapore Pte. Ltd., 1 Fusionopolis Walk, #07-01, Solaris South Tower, Singapore 138628, tel: 65-6643-8000, fax: 65-6643-8008, e-mail: enquiry@wiley.com.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor the author shall be liable for any damages arising herefrom.

Other Wiley Editorial Offices
John Wiley & Sons, 111 River Street, Hoboken, NJ 07030, USA
John Wiley & Sons, The Atrium, Southern Gate, Chichester, West Sussex, P019 8SQ, United Kingdom
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Library of Congress Cataloging-in-Publication Data:

ISBN 978-1-118-34363-0 (Paperback)
ISBN 978-1-118-34369-2 (ePDF)
ISBN 978-1-118-34368-5 (ePub)

ACKNOWLEDGMENTS

Thanks to those many readers who wrote to offer their suggestions for and insights into previous editions of Getting Started in Options, including constructive criticism and clarifying questions. Their letters have helped to improve the ever-changing set of explanations and examples, definitions, and other materials used in this book.

Very special thanks go to Debra Englander, my editor for many years at John Wiley & Sons, whose encouragement through many editions of this and other books has been greatly appreciated.

Also, many thanks to Nick Wallwork and Gemma Rosey, my editors in Singapore, for their excellent help and guidance through the production process.

ELEMENT KEY

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Definitions
This symbol is found in boxed notations providing specific definitions of options terms. These are placed within the book to accompany and augment discussions relevant to each definition.

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Key Points
These highlighted sections emphasize key points or offer observations, rules of thumb, and added points that options traders can use.

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Valuable Resources
These sections provide links to websites where you will find added value for particular options discussions, to further help in expanding your options knowledge base.

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Examples
Numerous examples illustrate points raised in context and provide a view of how the issues might apply using actual options trades. They are intended to demonstrate practical application of the principles being presented.

INTRODUCTION

Every investor and trader wants to combine several attributes in the stock portfolio: diversification, leverage, safety, and profitability.

This is a big order. How can you create all of these elements in the same portfolio? Tradition advises that if you want profits, you have to give up safety, and that if you want to use leverage, you have to take on greater risk.

In this book, these traditional problems are challenged by demonstrating how to combine the desirable attributes while managing and even eliminating the undesirable ones.

Options, once reserved for speculators and those able to tolerate high risk, have become mainstream devices for portfolio management. Many advanced option strategies can be applied so that risks are held down or even hedged entirely, while even conservative investors may create profits by combining options with stock positions.

Can options be used in a conservative manner? Yes; in fact, one of the best aspects to this market is that it can be designed to fit a range of risk tolerance profiles. The highly conservative investor may use options to reduce risk in long stock positions. On the far end of the spectrum, the speculator can continue to use options to swing trade, leverage, and seek fast profits. The range of strategies covers the entire risk spectrum.

This book presents a range of advanced strategies. It demonstrates how market volatility works as an advantage when options are properly used to profit from uncertainty. Spreads and straddles provide the means for designing an options portfolio to accomplish many goals. These include creation of a small but consistent profit potential in exchange for equally limited risk exposure.

The later chapters in the book examine some very interesting option strategies for even greater profits than those available from option trading on equities. Options on futures are very exciting; since futures are leveraged instruments already, options on futures are “leverage on leverage.” Trading options is much safer than trading directly in futures, however. Just as trading options on stocks is cheaper and often safer than trading shares directly, you can trade options on futures directly or through commodities-based exchange-traded funds (ETFs) or index funds. This market opens up many possibilities for large profits, while limiting risks to the relatively low cost of the option.

Index options are equally exciting. An index provides built-in diversification and broad exposure, in comparison to the very limited diversification available when you trade shares.

The flexibility of options opens many additional possibilities, including trading not in the underlying security, but in synthetic stock positions. The use of offsetting options is low-cost or no-cost (because the cost of long options is covered by income from short options); and the synthetic position moves exactly like the underlying security. Using synthetics allows traders to benefit from changes in the security price, but without needing to place a large amount of capital at risk.

The discussion of risk itself is often left out of investment and trading books, and this is a mistake. Clearly, risks have to exist in all markets, especially in options, or there would be no opportunity for profit. In options, traders need to understand the range of risks before placing capital into strategies. Too many option traders take on greater risks than they can afford, not so much because they don’t understand risk but because they are attracted to the trade itself. You are far better off settling for smaller and more consistent profits than going for broke& and going broke. The risk discussion is always one of the most important and essential elements in any investment strategy.

A later chapter explains how taxes work on option trading. As odd as the tax code is, rules for options are among the most complicated. This chapter by no means provides a comprehensive explanation of the technical rules applied to option profits and losses; but it does highlight the major considerations every trader needs to be aware of and should discuss with a tax adviser before entering into advanced strategies.

This book is designed to provide you with all of the tools you need to master the strategic and management aspects of advanced option trading. These attributes include:

Definitions in context. Every term is defined in the space next to the text as it is introduced. All definitions are also summarized in the Glossary at the end of the book.

Illustrations. The book includes dozens of illustrations designed to visually summarize key points and to show how strategies play out and are applied.

Key Points. These highlighted, brief statements provide you with the brief major points to be taken away from each section as it is presented.

Valuable Resources. These link you to the world of options resources and provide the benefits of access to topics and features that will improve your trading capabilities.

Examples. The text includes many examples that emphasize the points being offered, and show how strategies apply when put into trading modes.

End-of-chapter comic summaries. Each chapter concludes with a summary of highlights in the form of a comic strip. This is meant to highlight the key points, but in an entertaining and amusing manner seldom found in books on such technical subjects. This makes the book enjoyable on a new and different level.

The purpose to this series is to help investors and traders master advanced strategies–not only to understand the techniques and steps of each, but also to develop a context for them. This means being aware of risks as well as opportunities.

Advanced options as a strategic approach to portfolio management are exciting because you can design your own level of risk as a basic step in folding options into the risk-reduction strategies. Portfolio health should always be a primary goal and purpose for every investor. In spite of the long-standing reputation of options as having high risk and not being appropriate for most people, this book shows you how these amazing intangibles can be used to reduce risks while increasing profits.

CHAPTER 1

STRATEGIES IN VOLATILE MARKETS: UNCERTAINTY AS AN ADVANTAGE

The business of life is to go forward.

—Samuel Johnson, The Idler, 1759

Options traders have to be concerned with many different aspects of how and why they make decisions. The selection of stock, degree of risk, exposure, use of capital, which option to trade, whether to go long or short, and whether to use calls or puts—all of these decisions determine how successful you are in your options trades.

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calls

options providing their owners the right, but not the obligation, to purchase stock of an identified underlying security, at a fixed strike price, and on or before a fixed expiration date.

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puts

options providing their owners the right, but not the obligation, to sell stock of an identified underlying security, at a fixed strike price, and on or before a fixed expiration date. Every put provides these rights over 100 shares.

This book presents a range of advanced options strategies and is based on an understanding that there are many different kinds of traders. Some are speculators and enjoy the high risk with its amazing profit potential (and of course, the equally high potential of loss). Other traders are quite conservative and want to use options to manage their portfolios, reducing risk while increasing income.

With all of this in mind, a good starting point is to examine how a strategic approach to options trading is best designed in volatile markets. It seems that in the modern market, holding periods have been reduced from years to months, and in many cases to weeks. This fast turnaround is one change in the market that adds to volatility, which also drastically affects how stock ownership has changed—and where options trades fit in this new environment.

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!