Contents

Cover

Half Title page

Title page

Copyright page

Acknowledgments

Element Key

Introduction

Chapter 1: Calls & Puts: Defining the Fields of Play

The Call Option

The Put Option

Option Valuation

Chapter 2: Opening & Tracking: How It All Works

A Note on the Expiration Cycle

Opening and Closing Option Trades

Calculating the Rate of Return for Sellers

Chapter 3: Buying Calls: Maximizing the Rosy View

Understanding the Limited Life of the Call

Judging the Call

Call Buying Strategies

Defining Profit Zones

Chapter 4: Buying Puts: The Positive Side of Pessimism

The Limited Life of the Put

Judging the Put

Put Buying Strategies

Defining Profit Zones

Chapter 5: Selling Calls: Conservative and Profitable

Selling Uncovered Calls

Selling Covered Calls

Calculating Rate of Return

Chapter 6: Selling Puts: The Overlooked Strategy

Analyzing Stock Values

Evaluating Risks

Put Strategies

Chapter 7: Closing Positions: Cover, Close, Exercise, or Roll

Defining Possible Outcomes of Closing Options

Exercising the Option

Timing the Decision

Avoiding Exercise

Chapter 8: Paper Trading: A Test Run of the Theory

The Case for Paper Trading

Two Sites Worth Checking

Proceeding with a Paper-Trading Plan

Chapter 9: Calculating the Return: A Complex Aspect to Options

Finding A Realistic Method

Annualizing Models and Guidelines

An Overview of Basic Calculation for Calls

Anticipating the Likely Return

Glossary

Recommended Reading

About the Author

Index

GETTING STARTED IN
OPTIONS
ILLUSTRATED EDITION

Copyright © 2013 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.

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ISBN 978-1-118-39930-9 (Paperback)
ISBN 978-1-118-39926-2 (ePDF)
ISBN 978-1-118-39932-3 (Mobi)
ISBN 978-1-118-39931-6 (ePub)

ACKNOWLEDGMENTS

Thanks to those many readers who wrote to offer their suggestions for and insights into previous editions of this book, including constructive criticism and clarifying questions. Their letters have helped to improve the ever-changing sets 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

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

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

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.

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

INTRODUCTION

This edition is a departure from past evolution. In the past, editions were simply updated as new information evolved in the ever-changing options market. This new, illustrated edition contains many new elements and features not found in previous ones.

When the first edition of this book was published in 1989, the options market was very young and new. During that year, only 227 million contracts traded. Today, annual trading exceeds 4 billion contracts.

In the early days of this market, there was no Internet or affordable online order execution. The Internet has drastically changed all markets, including options, and has made them accessible to anyone with a PC or hand-held device. To give you an idea of how much matters have improved, today the clearing fees charged by the Options Clearing Corporation (OCC) are less than half of what they were before the year 2000.

The popularity of options trading is due to many factors. The market has grown up over the past two-plus decades. The investing and trading public consists of a broad range of people. Speculators are only a part of the overall options market today, expanding the importance of the options market into many areas beyond high-risk. Options may be either high-risk or extremely conservative, and can be used for portfolio management. This means that risks can be reduced and even eliminated with a carefully structured series of strategies aimed at offsetting downside risk.

The combination of Internet access and lower costs has combined to bring options to anyone and everyone who wants to find out how to use calls and puts as strategic tools. Product types have expanded throughout the period as well and today options are available not only on listed stocks, but also on indexes, exchange-traded funds (ETFs), and futures. Education has expanded as well. As options have become appealing to a wider range of investors and traders, industry experts and organizations like the OCC and the Chicago Board Options Exchange (CBOE) have vastly expanded their educational outreach.

This illustrated edition is designed with many new features. The book includes numerous examples, definitions in context, key points, website links, checklists, illustrations, and tables.

Anyone using this book to learn about options may appreciate that it includes some repetition. This is a device intended to help you to overcome the inherent complexity of options trading. The jargon is confusing at first, so it takes time to become accustomed to the new language of options. Making it even more difficult to quickly move into the market, the range of possible strategies is vast and this makes it important to take time to learn about options in steps.

Some suggestions for anyone new to this field:

Master the terminology. Focus on the many specialized option terms and get accustomed to seeing them in the context of examples and strategies.

Remember the context of risk. All investing and trading decisions are wisely made with an appreciation of the risk levels involved. Only by remembering risk can you know whether a strategy is appropriate for you.

Track both options and stocks on the market. Options traders need to observe how options change in value in relation to how stocks move in price, especially when markets are volatile. You will discover that options do not track stock price changes exactly; there are many factors influencing how options pricing changes.

Know yourself and what risks you can afford. It is all too easy for new options traders to be attracted to some strategies, even those that are too risky for them. So it is crucial that you know what you can afford, and what level of risk exposure works for you. This suggestion will make it more likely for you to succeed. Options work in the context of your own risk profile, and that is the key to any successful program.

The John Wiley & Sons Getting Started series is designed to help investors and traders overcome the complexity of markets. This is achieved with great teaching aids. These include carefully placed definitions, dozens of examples, illustrations, and more. The success of this series is due to the careful and thorough design of the many books in the series, and its emphasis on ease of use and provision of a lot of information. The Getting Started books are designed with you, the reader, in mind.

CHAPTER 1

CALLS & PUTS: DEFINING THE FIELDS OF PLAY

Nine-tenths of wisdom is being wise in time.

—Theodore Roosevelt, speech, June 14, 1917

Options are amazing tools that can help you expand your control over your portfolio, protect positions, reduce market risk, and enhance current income. Some strategies are very high risk, but others are extremely conservative. This is what makes the options market so interesting. The variety of creative uses of options makes it possible to tie in profits in the most uncertain of conditions, or to pursue income opportunities without being exposed to even the most volatile markets.

Because the option is an intangible device, its cost is only a fraction of stock prices. This makes it possible to control shares of stock without assuming the market risks. Each option controls 100 shares, so for approximately 10 percent of the cost of buying shares in a company, you can use options to create the same profit stream. This makes your capital go farther while keeping risks very low.

This idea—using intangible contracts to duplicate the returns you expect from well-picked stocks—is revolutionary to anyone who has never explored options trading. Most people are aware of the two best-known ways to invest money: equity and debt. An equity investment is the purchase of a share of stock or many shares of stock, which represents a partial interest in the company itself. Shares are sold through stock exchanges or over the counter (trades made on companies not listed on an exchange). For example, if a company has one million shares outstanding and you buy 100 shares, you own 100/1,000,000ths, or .0001 percent of the company.

equity investment

An investment in the form of part ownership, such as the purchase of shares of stock in a corporation.

When you buy 100 shares of stock, you are in complete control over that investment. You decide how long to hold the shares and when to sell. Stocks provide you with tangible value, because they represent part ownership in the company. Owning stock entitles you to dividends if they are declared, and gives you the right to vote in elections offered to stockholders. (Some special nonvoting stock lacks this right.) If the stock rises in value, you will gain a profit. If you wish, you can keep the stock for many years, even for your whole life. Stocks, because they have tangible value, can be traded over public exchanges, or they can be used as collateral to borrow money.

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!