Options

Options

by Michael C. Thomsett
Released July 2018
Publisher(s): De Gruyter
ISBN: 9781547400119

Read it now on the O’Reilly learning platform with a 10-day free trial.

O’Reilly members get unlimited access to books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.

Start your free trial

Book description

With over 300,000 copies sold, the new edition of this comprehensive mentoring guide clearly presents all of the essential information needed to learn to trade options.

Whereas most options books focus on profit and loss opportunities, this book addresses the issues of hedging market risks in an equity portfolio head on. The author presents the compelling argument that options should not be thought of as risky stand-alone trading vehicles, but offer greater value as a coordinated strategic methodology for managing equity portfolio risks as presented in numerous examples in this book.

Divided into four parts, Options reflects a guiding standard of the past nine editions and includes:

  • Crystal clear explanations of the attributes and strategies of calls and puts.

  • A chapter on the short life of an option. This, missing in almost every options book, is a key to understanding options trading.

  • Examples in Part 1 showing different trading strategies on both sides of the trade.

The second part of the book is about closing positions; taking profit, exercising, expirations or rolling forward your position, risk analysis, profit calculations, and the impact of volatility.

The third part simplifies the complex issues of advanced strategies including the various spreads, combining spreads to successfully hedge other positions and how certain strategies work. Each spread is covered in at least one detailed example.

The final part is on evaluating risk. The unquestioned benefits of hedging risk and strategies that are virtually guaranteed to succeed that are generally the domain of the investment giants along with many examples are discussed.

The book’s broad coverage makes it an incredibly valuable desk reference to any trader in options. You won’t get explanations like these on the internet.

Michael C. Thomsett is a market expert, author, speaker, and coach. His many books include Stock Market Math, Candlestick Charting, The Mathematics of Options, and A Technical Approach to Trend Analysis.

Click here to see an interview with the author.

https://youtu.be/8bgrgLB3Mx4

Table of contents

  1. Title Page
  2. Copyright
  3. Contents
  4. Part I: The Basics
    1. Chapter 1: Calls and Puts: Defining the Field of Play
      1. Equity Investments
      2. Debt Investments
      3. Investments with No Tangible Value: Options
      4. Trading Options on Exchanges
      5. Calls and Puts
        1. The Call Option
        2. The Long-Term Call Option
        3. Investment Standards for Call Buyers
        4. How Call Selling Works
        5. The Put Option
      6. Option Valuation
        1. Picking the Right Stock
        2. Intrinsic Value and Time Value
    2. Chapter 2: The Life of an Option
      1. Expiration and Exercise
        1. What is “Clearing”?
        2. Bid and Ask
        3. Order Entry
      2. Types of Orders
      3. Who Are the Players?
    3. Chapter 3: Opening and Tracking: How It All Works
      1. Terms of the Option (Standardized Terms)
        1. Strike Price
        2. Expiration Date
        3. Type of Option
        4. Underlying Stock
      2. A Note on the Expiration Cycle
      3. Opening and Closing Option Trades
        1. Using the Daily Options Listings
      4. Understanding Option Abbreviations
      5. Calculating the Rate of Return for Sellers
    4. Chapter 4: Buying Calls: Maximizing the Rosy View
      1. Understanding the Limited Life of the Call
      2. Judging the Call
      3. Call Buying Strategies
        1. Strategy 1: Calls for Leverage
        2. Strategy 2: Limiting Risks
        3. Strategy 3: Planning Future Purchases
        4. Strategy 4: Insuring Profits
        5. Strategy 5: Premium Buying
        6. Strategy 6: Pure Speculation
      4. Defining Profit Zones
    5. Chapter 5: Buying Puts: The Positive Side of Pessimism
      1. The Limited Life of the Put
      2. Judging the Put
      3. Put Buying Strategies
        1. Strategy 1: Gaining Leverage
        2. Strategy 2: Limiting Risks
        3. Strategy 3: Hedging a Long Position
        4. Strategy 4: Pure Speculation
      4. Defining Profit Zones
    6. Chapter 6: Selling Calls: Conservative and Profitable
      1. Selling Uncovered Calls
        1. Assessing Uncovered Call Writing Risks
        2. A Question of Suitability
      2. Selling Covered Calls
        1. Assessing Covered Call Writing Risks
      3. Calculating the Rate of Return
    7. Chapter 7: Selling Puts: The Overlooked Strategy
      1. Analyzing Stock Value
      2. Evaluating Risks
      3. Put Strategies
        1. Strategy 1: Producing Income
        2. Strategy 2: Using Idle Cash
        3. Strategy 3: Buying Stock
        4. Strategy 4: Writing a Covered Put on Short Stock
        5. Strategy 5: Creating a Tax Put
  5. Part II: Closing the Position
    1. Chapter 8: Closing Positions: Profit, Exercise, or Roll
      1. Defining Possible Outcomes of Closing Options
        1. Results for the Buyer
        2. Results for the Seller
      2. Exercising the Option
      3. Timing the Decision
      4. Avoiding Exercise
    2. Chapter 9: Paper Trading: A Test Run of the Theory
      1. The Case for Paper Trading
      2. Sites Worth Checking
        1. www.Optionsxpress.com
        2. marketwatch.com
        3. www.investopedia.com
      3. Proceeding with a Paper Trading Plan
      4. The Dangers of Paper Trading
    3. Chapter 10: Calculating the Return: A Complex Aspect to Options
      1. Finding a Realistic Method
      2. Annualizing Models and Guidelines
      3. An Overview of Basic Calculations for Calls
        1. You Close the Position and Calculate Option-Based Net Return
        2. You Close the Position and Calculate Net Return Based on the Entire Position
        3. The Covered Call is Exercised, and You Calculate Option and Stock Profits Separately
        4. Any Covered Call Outcome Is Computed Strictly Based on Capital on Deposit
      4. Anticipating the Likely Return
    4. Chapter 11: The Basics of Risk: What Every Trader Needs to Know
      1. Volatility as the Definition of Risk
      2. Historical Volatility
      3. Implied Volatility
      4. Pricing Models
      5. Risk and Human Nature
        1. Confirmation Bias
        2. Anchoring
        3. Herding
        4. Framing
        5. Selective Memory
        6. Loss Aversion
    5. Chapter 12: Strategies in Volatile Markets: Uncertainty as an Advantage
      1. Avoiding 10 Common Mistakes
      2. Modifying Your Risk Tolerance
      3. The Nature of Market Volatility
      4. Market Volatility Risk
      5. Options in the Volatile Environment
  6. Part III: Advanced Strategies
    1. Chapter 13: Combinations and Spreads: Creative Risk Management
      1. Overview of Advanced Strategies
        1. The Spread
        2. The Hedge
        3. The Straddle
        4. The Strangle
      2. Vertical Spread Strategies
        1. Bull Spreads
        2. Bear Spreads
        3. Box Spreads
        4. Debit and Credit Spreads
      3. Horizontal and Diagonal Spread Strategies
      4. Altering Spread Patterns
        1. Varying the Number of Options
        2. Expanding the Ratio
      5. Strategies with Moneyness Close to Underlying Prices
        1. Variations on the Butterfly
        2. Multi-Leg Option Orders
      6. In Conclusion
    2. Chapter 14: Hedges and Straddles: More Creativity
      1. The Two Types of Hedges
      2. Hedging Beyond Coverage
      3. Hedging Option Positions
      4. Partial Coverage Strategies
      5. Straddle Strategies
        1. Middle Loss Zones
        2. Middle Profit Zones
      6. Theory and Practice of Combined Techniques
      7. In Conclusion
    3. Chapter 15: Options for Specialized Trading: Leveraging the Technical Approach
      1. Swing Trading Basics
      2. The Setup Signal
      3. Testing the Theory
      4. A Strategic View of Option for Swing Trading
        1. Selection of Stocks Based on Value
        2. A Stock’s Price Volatility
        3. Price History (Recent and Potential)
        4. The Price-To-Earnings (P/E) Ratio of the Stock
        5. Fundamental and Technical Tests of the Company and Stock
      5. Options Used for Other Trading Strategies
      6. Swing- and Day-Trading Advanced Strategies
        1. Taking Partial Profits
        2. Partial Exercise
        3. Add More Option Contracts in Times of Price Momentum
      7. In Conclusion
    4. Chapter 16: Options on Futures: Leveraging Your Leverage
      1. Important Distinctions
      2. Regulatory Differences
      3. In Conclusion
    5. Chapter 17: Synthetic Positions: Tracking the Stock
      1. Synthetic Put (Protected Short Sale)
      2. Synthetic Long Call (Insurance Put, or Married Put)
      3. Synthetic Long Stock
      4. Synthetic Short Stock
      5. Split Strike Strategy (Bullish)
      6. Split Strike Strategy (Bearish)
      7. Collars
      8. Synthetic Straddles
      9. In Conclusion
  7. Part IV: Risk Evaluation
    1. Chapter 18: Risk: Rules of the Game
      1. Identifying the Range of Risk
        1. Margin and Collateral Risk
        2. Personal Goal Risks
        3. Risk of Unavailable Market
        4. Risk of Disruption in Trading
        5. Brokerage Risks
        6. Trading Cost Risk
        7. Lost Opportunity Risks
        8. Tax Consequence Risk
      2. Evaluating Your Risk Tolerance
      3. In Conclusion
    2. Chapter 19: Taxes: The Wild Card of Options Trading
      1. Tax Rules for Options
      2. Qualified Covered Calls—Special Rules
      3. Looking to the Future
      4. In Conclusion
    3. Chapter 20: Choosing Stocks: Finding the Right Ingredients
      1. Developing a Covered Call Action Plan
      2. Selecting Stocks for Call Writing
        1. Benefiting from Price Appreciation
      3. Analyzing Stocks
        1. Fundamental Tests
        2. Technical Tests
        3. Deciding Which Tests to Apply
      4. Applying Analysis to Options—the “Greeks”
        1. Beta
        2. Delta
        3. The Rest of the Greeks
      5. Acting on Good Information
        1. Putting Your Rules Down on Paper
      6. In Conclusion
  8. Glossary
  9. Index

Product information

  • Title: Options
  • Author(s): Michael C. Thomsett
  • Release date: July 2018
  • Publisher(s): De Gruyter
  • ISBN: 9781547400119