Options: The Essential Guide for Getting Started in Derivatives Trading, Tenth Edition

Options: The Essential Guide for Getting Started in Derivatives Trading, Tenth Edition

by Michael C Thomsett

Paperback(10th edition)

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Product Details

ISBN-13: 9781547416141
Publisher: De|G Press
Publication date: 07/23/2018
Edition description: 10th edition
Pages: 456
Sales rank: 249,602
Product dimensions: 6.69(w) x 9.45(h) x (d)
Age Range: 18 Years

About the Author

Michael C. Thomsett, Business Writer

Table of Contents

Part I: The Basics— 1

Chapter 1: Calls and Puts: Defining the Field of Play — 3

Equity Investments — 3

Debt Investments — 4

Investments with No Tangible Value: Options — 5

Trading Options on Exchanges — 7

Calls and Puts — 10

The Call Option — 13

The Long-Term Call Option — 20

Investment Standards for Call Buyers — 21

How Call Selling Works — 22

The Put Option — 26

Option Valuation — 32

Picking the Right Stock — 37

Intrinsic Value and Time Value — 38

Chapter 2: The Life of an Option — 45

Expiration and Exercise — 45

What is “Clearing”? — 46

Bid and Ask — 47

Order Entry — 48

Types of Orders — 49

Who Are the Players? — 49

Chapter 3: Opening and Tracking: How It All Works — 51

Terms of the Option (Standardized Terms) — 51

Strike Price — 51

Expiration Date — 52

Type of Option — 53

Underlying Stock — 54

A Note on the Expiration Cycle — 54

Opening and Closing Option Trades — 56

Using the Daily Options Listings — 56

Understanding Option Abbreviations — 59

Calculating the Rate of Return for Sellers — 61

Chapter 4: Buying Calls: Maximizing the Rosy View — 65

Understanding the Limited Life of the Call — 66

Judging the Call — 70

Call Buying Strategies — 76

Strategy 1: Calls for Leverage — 76

Strategy 2: Limiting Risks — 80

Strategy 3: Planning Future Purchases — 81

Strategy 4: Insuring Profits — 82

Strategy 5: Premium Buying — 84

Strategy 6: Pure Speculation — 85

Defining Profit Zones — 87

Chapter 5: Buying Puts: The Positive Side of Pessimism — 93

The Limited Life of the Put — 95

Judging the Put — 101

Put Buying Strategies — 106

Strategy 1: Gaining Leverage — 107

Strategy 2: Limiting Risks — 109

Strategy 3: Hedging a Long Position — 110

Strategy 4: Pure Speculation — 114

Defining Profit Zones — 115

Chapter 6: Selling Calls: Conservative and Profitable — 119

Selling Uncovered Calls — 121

Assessing Uncovered Call Writing Risks — 126

A Question of Suitability — 127

Selling Covered Calls — 129

Assessing Covered Call Writing Risks — 133

Calculating the Rate of Return — 134

Chapter 7: Selling Puts: The Overlooked Strategy — 139

Analyzing Stock Value — 143

Evaluating Risks — 145

Put Strategies — 146

Strategy 1: Producing Income — 147

Strategy 2: Using Idle Cash — 149

Strategy 3: Buying Stock — 150

Strategy 4: Writing a Covered Put on Short Stock — 153

Strategy 5: Creating a Tax Put — 153

Part II: Closing the Position — 157

Chapter 8: Closing Positions: Profit, Exercise, or Roll — 159

Defining Possible Outcomes of Closing Options — 159

Results for the Buyer — 160

Results for the Seller — 160

Exercising the Option — 162

Timing the Decision — 168

Avoiding Exercise — 171

Chapter 9: Paper Trading: A Test Run of the Theory — 183

The Case for Paper Trading — 185

Sites Worth Checking — 187

www.Optionsxpress.com — 187

marketwatch.com — 188

www.investopedia.com — 188

Proceeding with a Paper Trading Plan — 188

The Dangers of Paper Trading — 189

Chapter 10: Calculating the Return: A Complex Aspect to Options — 193

Finding a Realistic Method — 193

Annualizing Models and Guidelines — 195

An Overview of Basic Calculations for Calls — 198

You Close the Position and Calculate Option-Based Net Return — 199

You Close the Position and Calculate Net Return Based on the Entire

Position — 199

The Covered Call is Exercised, and You Calculate Option and Stock Profits

Separately — 200

Any Covered Call Outcome Is Computed Strictly Based on Capital on

Deposit — 200

Anticipating the Likely Return — 201

Chapter 11: The Basics of Risk: What Every Trader Needs to Know — 205

Volatility as the Definition of Risk — 205

Historical Volatility — 207

Implied Volatility — 210

Pricing Models — 213

Risk and Human Nature — 215

Confirmation Bias — 216

Anchoring — 216

Herding — 217

Framing — 217

Selective Memory — 218

Loss Aversion — 218

Chapter 12: Strategies in Volatile Markets: Uncertainty as an Advantage — 221

Avoiding 10 Common Mistakes — 222

Modifying Your Risk Tolerance — 228

The Nature of Market Volatility — 229

Market Volatility Risk — 230

Options in the Volatile Environment — 235

Part III: Advanced Strategies — 241

Chapter 13: Combinations and Spreads: Creative Risk Management — 243

Overview of Advanced Strategies — 246

The Spread — 246

The Hedge — 251

The Straddle — 252

The Strangle — 253

Vertical Spread Strategies — 255

Bull Spreads — 256

Bear Spreads — 258

Box Spreads — 262

Debit and Credit Spreads — 265

Horizontal and Diagonal Spread Strategies — 265

Altering Spread Patterns — 270

Varying the Number of Options — 271

Expanding the Ratio — 274

Strategies with Moneyness Close to Underlying Prices — 277

Variations on the Butterfly — 280

Multi-Leg Option Orders — 281

In Conclusion — 282

Chapter 14: Hedges and Straddles: More Creativity — 283

The Two Types of Hedges — 283

Hedging Beyond Coverage — 286

Hedging Option Positions — 288

Partial Coverage Strategies — 292

Straddle Strategies — 295

Middle Loss Zones — 295

Middle Profit Zones — 298

Theory and Practice of Combined Techniques — 301

In Conclusion — 302

Chapter 15: Options for Specialized Trading: Leveraging the Technical

Approach — 303

Swing Trading Basics — 305

The Setup Signal — 308

Testing the Theory — 311

A Strategic View of Option for Swing Trading — 313

Selection of Stocks Based on Value — 313

A Stock’s Price Volatility — 314

Price History (Recent and Potential) — 315

The Price-To-Earnings (P/E) Ratio of the Stock — 315

Fundamental and Technical Tests of the Company and Stock — 316

Options Used for Other Trading Strategies — 316

Swing- and Day-Trading Advanced Strategies — 317

Taking Partial Profits — 318

Partial Exercise — 319

Add More Option Contracts in Times of Price Momentum — 319

In Conclusion — 320

Chapter 16: Options on Futures: Leveraging Your Leverage — 321

Important Distinctions — 322

Regulatory Differences — 326

In Conclusion — 328

Chapter 17: Synthetic Positions: Tracking the Stock — 331

Synthetic Put (Protected Short Sale) — 333

Synthetic Long Call (Insurance Put, or Married Put) — 334

Synthetic Long Stock — 336

Synthetic Short Stock — 338

Split Strike Strategy (Bullish) — 340

Split Strike Strategy (Bearish) — 342

Collars — 343

Synthetic Straddles — 350

In Conclusion — 353

Part IV: Risk Evaluation — 355

Chapter 18: Risk: Rules of the Game — 357

Identifying the Range of Risk — 357

Margin and Collateral Risk — 360

Personal Goal Risks — 360

Risk of Unavailable Market — 361

Risk of Disruption in Trading — 362

Brokerage Risks — 363

Trading Cost Risk — 363

Lost Opportunity Risks — 364

Tax Consequence Risk — 365

Evaluating Your Risk Tolerance — 366

In Conclusion — 367

Chapter 19: Taxes: The Wild Card of Options Trading — 369

Tax Rules for Options — 369

Qualified Covered Calls—Special Rules — 373

Looking to the Future — 378

In Conclusion — 379

Chapter 20: Choosing Stocks: Finding the Right Ingredients — 381

Developing a Covered Call Action Plan — 385

Selecting Stocks for Call Writing — 387

Benefiting from Price Appreciation — 388

Analyzing Stocks — 390

Fundamental Tests — 394

Technical Tests — 398

Deciding Which Tests to Apply — 400

Applying Analysis to Options—the “Greeks” — 401

Beta — 402

Delta — 402

The Rest of the Greeks — 404

Acting on Good Information — 406

Putting Your Rules Down on Paper — 407

In Conclusion — 408

Glossary — 409

Index — 409

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