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Options Trading for the Conservative Investor: Increasing Profits Without Increasing Your Risk

Book Description

Other copy "Every open-minded conservative investor should read this book."

–Lawrence G. McMillan, author of Options as a Strategic Investment

"The author's option trading guidelines include important issues often overlooked by investors. Attention conservative investors! Michael Thomsett's Options Trading for the Conservative Investor has hit a bulls eye...for you!"

–Marty Kearney, The Options Institute, Chicago Board Options Exchange

"Michael Thomsett has done a terrific job of showing how a conservative investor can use certain option strategies to his advantage. He spells out how that investor can utilize options to provide income, to protect stock holdings, or even as a substitute for stock itself. Every open-minded conservative investor should read this book."

–Lawrence G. McMillan; publisher, The Options Strategist newsletter; president, McMillan Analysis Corporation; author, Options as a Strategic Investment

"This book is a must for the diligent investor. Perfectly timed for these uncertain markets, Michael Thomsett provides a lucid guide for how to approach options trading conservatively, yet also focuses on the fundamental need for good returns and provides real examples throughout."

–Guy Cohen; author of The Bible of Options Strategies and creator of OptionEasy (www.optioneasy.com)

If you're an investor concerned with preserving capital, maximizing predictability, and maintaining consistently strong returns, your best solution just might surprise you: Options. In Options Trading for the Conservative Investor, Michael C. Thomsett reveals a narrow band of options strategies that can help you improve results as you systematically reduce unnecessary risk throughout your portfolio.

Thomsett, author of the global best-seller Getting Started in Options, writes in simple, nontechnical language, uses real examples, and guides you through every strategy–one easy step at a time. He's made this book simple and visual enough for any experienced investor to use, even if they have no experience trading options. Thomsett is also the author of Stock Profits: Getting to the Core (Financial Times-Prentice Hall 2004), The Leaps Strategist (Marketplace Books 2004), and Investment and Securities Dictionary (McFarland & Company 1986).

Thomsett systematically covers several options strategies optimized for conservative investors, including covered call writing on carefully selected stocks, contingent purchase strategies, and powerful "combination" strategies that produce cash to bolster current income. No matter how cautious an investor you are, this book will give you powerful new tools for achieving your financial goals–without losing a moment of sleep.

  • Fundamental ground rules for conservative options investors

  • What you should know and believe before you get started

  • How options fit into your conservative trading strategy

  • Deciding what stocks to buy or sell options on–and what to avoid

  • Examples and case studies based on an actual model portfolio

  • Practical guidance for leveraging each strategy with your own portfolio

  • Practical "rescue" strategies

  • Recovering your investments when market values have fallen

  • How to take profits without selling stock

  • Step-by-step techniques based on long puts and short calls

  • Improve Returns–Without Added Risk!

  • Easy, step-by-step options strategies for increasing income and protecting capital

  • Preserving your spending power after inflation and taxes

  • Avoiding unacceptable market, liquidity, and diversification risks

  • Protecting your profits without losing invested positions

  • No options experience necessary!

  • By Michael C. Thomsett, author of the worldwide best-seller Getting Started in Options, 6th Edition (John Wiley & Sons 2005)

  • The world's #1 options author has written the definitive options guide for conservative investors! One step at a time, you'll discover how to use options to increase yields, reduce risks, protect existing positions, and ride safely through any market down cycle. Want double-digit returns without heart-pounding risk? Here are the options you've been searching for!

    © Copyright Pearson Education. All rights reserved.

    Table of Contents

    1. Copyright
    2. Financial Times Prentice Hall
    3. Financial Times Prentice Hall Books
    4. Preface
      1. The Elusive Goal: Low Risk and High Yield
    5. Acknowledgments
    6. About the Author
    7. 1. Setting the Ground Rules
      1. The Ground Rules
      2. A Model Portfolio
    8. 2. Option Basics
      1. The Workings of Option Contracts
        1. Option Attributes to Determine Value
        2. Intrinsic and Time Value Premium
        3. Long-Term Options and Their Advantages
        4. Strike Price of Options
        5. The Time Advantage for Short Sellers
      2. Long and Short
        1. Taking Profits Without Selling Stock
        2. Buyer and Seller Positions Compared
        3. Understanding Short Seller Risks
      3. Calls and Call Strategies
        1. Is the Strategy Appropriate?
        2. Option Terms and Their Meaning
        3. The Cost of Trading
        4. In, At, or Out of the Money
      4. Puts and Put Strategies
        1. The Overlooked Value of Puts
        2. The Insurance Cost of Puts
        3. Conservative Guidelines: Selling Puts
        4. Puts as a Form of Contingent Purchase
      5. Listed Options and LEAPS Options
        1. Using Long Calls in Volatile Markets
        2. Using LEAPS Puts in a Covered Capacity
      6. Coordinating Strategies with Portfolio Goals
      7. Option and Stock Volatility: The Central Element of Risk
        1. Critical Analysis of Volatility
        2. Free 20-Minute Delayed Quotes
        3. The Black-Scholes Model
        4. Identifying Your Market Opportunities
        5. Limiting Your Strategies to Conservative Plays
        6. Identifying Quality of Earnings
      8. Trading Costs in the Option Analysis
        1. Calculating the Net Profit or Loss
      9. Tax Rules for Options: An Overview
      10. The Importance of Professional Advice and Tax Planning
    9. 3. Options in Context
      1. The Nature of Risk and Reward
        1. Using Volatility as the Primary Risk Measurement
        2. Options Used to Mitigate Stock Investment Risk
        3. Another Kind of Volatility
        4. Lost Opportunity Risk and Options
      2. Perceptions About Options
        1. Finding the Conservative Context for Options Trading
        2. Strategic Timing and Short-Term Price Changes
      3. Short Positions, Naked or Covered
        1. The Uncovered Call—A Violation of the Conservative Theme, Usually
        2. A Stock's Likely Lowest Theoretical Price Level
        3. Short Put Risks—Not as Drastic as Short Call Risks
      4. Margin Requirements and Trading Restrictions
        1. Other Margin Rules
      5. Return Calculations—Seeking Valid Comparisons
        1. Return If Exercised
        2. Return If Expired
      6. Long-Term Goals as a Guiding Force
      7. Exercise as a Desirable Outcome
    10. 4. Managing Profits and Losses
      1. Your Conservative Dilemma
        1. Deciding How to Establish Your Policies
      2. Managing Profits with Options
        1. Basing Decisions on the Fundamentals
        2. The Reality of Risk
      3. Overcoming the Profit-Taking Problem
        1. Realizing Profits Without Selling Stock
        2. Further Defining Your Personal Investing Standards
        3. When a Rescue Strategy Is Appropriate
        4. Reverting to a Secondary Strategy
      4. Managing the Inertia Problem
        1. Inertia Management
      5. Taxes and Profits
        1. Options Used for Riding Out Volatility
    11. 5. Options as Cash Generators
      1. The Covered Call Concept
        1. Who Makes the Decision?
      2. Examples: Ten Stocks and Covered Calls
        1. Working within Pre-Established Standards
        2. Calculating the Gain Comparatively
      3. Smart Conservative Ground Rules
      4. A Conservative Approach
      5. Tax Ramifications of Covered Calls
        1. Six Levels of Separation (of Your Money) for Taxes
      6. Rolling Forward and Up—Exercise Avoidance
        1. The Types of Rolls
      7. The Exercise Acceptance Strategy
        1. Remembering to Limit Yourself to Conservative Strategies
    12. 6. Alternatives to Stock Purchase
      1. Leverage and Options
        1. Applications of Contingent-Purchase Strategies
      2. The Long-Call Contingent-Purchase Strategy
        1. Diversifying Exposure with Several Stocks in Play
        2. Reducing Contingent Purchase Risks
      3. The Covered Long Call
        1. Extrapolating Future Strike Prices
        2. Using the Forward Roll Effectively
      4. Short Puts and Contingent Purchase
        1. The Value of Selling Puts
        2. The Value of Shorter Exposure Terms
      5. Rescue Strategy Using Calls
        1. Rescue Strategy Based on Smart Stock Choices
        2. Programming a Profitable Result
        3. The Ratio Write—Before Adjusting to Make It Conservative
        4. Converting the Ratio Write into a Conservative Strategy
        5. Ratio Writes for Rescue Strategies and Higher Current Returns
      6. Rescue Strategy Using Puts
        1. The Risk of Continued Price Declines
      7. Covered Calls for Contingent Sale
        1. Picking the Right Conditions for Forced Exercise
    13. 7. Option Strategies in Down Markets
      1. Thinking Outside the Market Box
        1. Remembering the Fundamentals
        2. Conservative Versus Speculative: Remembering the Difference
      2. The Long Put: The Overlooked Option
        1. When the Stock's Price Rises
        2. When the Stock's Price Falls
      3. Short Puts: A Variety of Strategies
        1. Conservative Ground Rules for Short Puts
        2. Comparing Rates of Return for Dissimilar Strike Prices
        3. Three Types of Rescue Strategies
      4. Using Calls in Down Markets
        1. Calls Used for Leverage, but Not for Speculation
      5. Evaluating Your Stock Positions
        1. Rescue Strategies and Opportunity
        2. Examining the Causes of Price Volatility
        3. Deciding When to Sell and Replace Stock
      6. Stock Positions and Risk Evaluation
        1. The Relationship Between Stock Safety and Options
        2. Examining Your Risk Profile
      7. Options and Downside Risk
        1. The Down-Market Benefits of Options
      8. Option Planning with Loss Carryover
        1. Timing: Matching Current-Year Profits and Losses
    14. 8. Combination Conservative Techniques
      1. Spread Techniques
        1. Advanced Spread Terminology
      2. Straddle Techniques
        1. Short Straddles for Conservative Positions and High Rates of Return
      3. Long or Short Positions
        1. Mixing the Long and the Short
      4. Theory Versus Practice
        1. Simplicity as a Worthy Goal
        2. Worst-Case Outcome as a Desirable Result
      5. Tax Problems with Combination Strategies
        1. The Anti-Straddle Rule and Its Effect
      6. The Ultimate High-Return Strategy
        1. A Review of Your Conservative Assumptions
      7. Examples of the Strategy in Practice
        1. Pick Your Portfolio
        2. Pick Expiration Dates
        3. Review Trading Range Trends
        4. Look for Available Options and Strike Prices
        5. Compare Yields
        6. Select Stocks for the Short Combination Strategy
      8. Outcome Scenarios
        1. Planning Ahead for Each Outcome Scenario
      9. The Augmented Strategy—A Short Straddle
        1. How the Dollar Values Alone Can Mislead
        2. Maximum Advantage: Large-Point Discounts
      10. Rescue Strategies
        1. Three Valuable Rescue Strategies
    15. 9. Stock Selection and the Option Contract
      1. Remembering Your Conservative Profile as a Priority
      2. Dangers and Pitfalls in Using Options
        1. Allocation by Risk Profile
        2. Using Options to Reduce Market Risk
      3. Temptation to Select Most Volatile Stocks
        1. Creating a List of Potential Investments
      4. Creating Sensible Conservative Standards
        1. The Five Conservative Standards for Stock Selection
      5. Maintaining Fundamental Clarity
        1. Distinctions: Risk Standards Versus Brand Loyalty
      6. The Importance of Taxes in the Option Equation
        1. Five Tax Guidelines
      7. Option Volatility to Judge Stocks
        1. Volatility as an Early Indicator
    16. Option Trading Strategies
    17. GLOSSARY