Trading Options For Dummies

Trading Options For Dummies

by Joe Duarte


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Trading Options For Dummies by Joe Duarte

A new edition of the trusted trading resource

Updated with new facts, charts, and strategies to help investors beat today’s tough markets, Trading Options For Dummies helps you choose the right options based on your investing needs. It will show you how to weigh the costs and benefits, build a strategy to gain no matter the market conditions, and broaden your retirement portfolio with index, equity, and ETF options.

Because options cost less than stocks, they’re a versatile trading instrument. If you’re an investor with some general knowledge of trading but want a better understanding of risk factors, new techniques, and an overall improved profit outcome, Trading Options For Dummies is the book for you.

  • Protect your investments against a decline in market prices
  • Increase your income on current or new investments
  • Buy an equity at a lower price
  • Benefit from an equity price’s rise or fall without owning it or selling it outright

Trading options can be a great way to manage your risk, and this detailed reference gives you the expert help you need to succeed.

Product Details

ISBN-13: 9781119363705
Publisher: Wiley
Publication date: 08/28/2017
Pages: 408
Sales rank: 119,154
Product dimensions: 7.30(w) x 9.40(h) x 0.90(d)

About the Author

Joe Duarte, MD is a financial writer, private investor and trader, and former money manager/president of River Willow Capital Management. His work has been quoted in Barron's,, and The Wall Street Journal. He is the author of Trading Futures For Dummies and Market Timing For Dummies.

Table of Contents

Introduction 1

About This Book 1

Foolish Assumptions 2

Icons Used in This Book 3

Beyond the Book 4

Where to Go from Here 4

Part I Getting Started 7

Chapter 1 Options Trading and the Individual Investor 9

Taking Your Own Financial and Strategic Pulse 10

Understanding Options 11

Knowing option essentials 12

Trying different strategies before deploying them in real time 13

Noodling out where options will work for your trading 15

Differentiating Between Option Styles 15

Using options to limit your risk 16

Applying options to sector investing 17

Using Options In Challenging Markets 17

Reducing your directional bias and making money in flat markets 18

Controlling your emotions 18

Chapter 2 Introducing Options 19

Understanding Option Contracts 19

Grasping option basics 20

Comparing options to other securities 21

Valuing Options 23

Knowing your rights and obligations as an options trader 23

Terms of endearment and importance 24

Making Sense of Options Mechanics 24

Identifying options 25

Turning with the expiration cycle 26

Options expiration is decision time 27

Detailing your rights 28

Birthing Option Contracts 28

Opening and closing positions 29

Selling an option you don't own 30

Keeping Some Tips in Mind 31

Chapter 3 Trading Places: Where the Action Happens 33

The U.S. Options Exchanges 33

Navigating the Markets 34

Trade execution 34

Option market participants 35

Transactions unique to options 36

Trading rules you should know 37

Weighing Option Costs and Benefits 39

Identifying costs unique to options 40

Valuing options benefits 41

Grasping Key Option Pricing Factors 44

Introducing option Greeks 45

Connecting past movement to the future 46

Chapter 4 Option Risks and Rewards 51

Understanding Your Trading Risks 52

Risking money with stocks 52

Calculating option risks 54

Reaping Your Rewards 55

Benefiting from stocks 56

Breaking even with options 56

Profiling Risk and Reward 58

Profiling stock trades with risk graphs 59

Profiling option trades with risk graphs 60

Combining option positions 62

Considering the worst-case scenario 64

Part II Evaluating Markets, Sectors, and Strategies 67

Chapter 5 Analyzing Mood Swings in the Market 69

A Few Words About Select Macro Factors 70

Assessing the Market's Bias 70

Judging the strength of a move 71

(Psycho)-analyzing the market 77

Watching Call and Put Activity 79

Understanding put-to-call ratios 79

Using the put volume indicator 82

Using Volatility to Measure Fear 83

Measuring volatility 83

Recognizing impact from changing volatility 84

Spelling fear the Wall Street way: V-I-X 84

Applying Breadth and Sentiment Tools 86

Locating neutral areas for indicators 86

Identifying indicator extremes 87

Chapter 6 Sector Analysis: Technical and Fundamental 91

Getting Technical with Charts 92

Chart basics 92

Adjusting your time horizon for the best view 93

Visualizing supply and demand 94

Identifying Relatively Strong Sectors 96

Relative ratios 96

Rate of change indicator 99

Using Sector Volatility Tools 101

Displaying volatility with indicators 102

Analyzing volatility with Bollinger bands 105

Projecting Prices for Trading 106

Support and resistance 107

Trends 109

Channels 110

Price retracements and extensions 112

Projections and probabilities 114

Chapter 7 Practicing Before You Swing 117

Monitoring Option Greek Changes 118

Tracking premium measures 118

Changing volatility and option prices 119

Paper Trading a Trading Strategy 121

Trading on paper: Pluses and minuses 121

Implementing electronic paper trades 122

Using Trading Systems 122

Knowing what you're getting 123

Performing a backtest 124

Adding risk management to a backtest 128

Shifting from Knowledge to Mastery 129

Setting the right pace 130

Achieving mastery through longevity 132

Chapter 8 Designing A Killer Trading Plan 135

Managing Your Costs 135

Optimizing Order Execution 138

Understanding option orders 138

Entering a new position 142

Executing a quality trade 145

Exiting an existing position 147

Part III What Every Trader Needs to Know About Options 151

Chapter 9 Getting to Know Different Option Styles 153

Nailing Down Index Options 153

Getting to the nitty-gritty of indexes 154

Capitalizing on an index with options 157

Watching Out for Style Risk 159

American-style options 159

European-style options 160

Exercising Your Options American Style 162

Knowing the nuts and bolts 163

What you see is what you get 163

To exercise or not, that is the question 164

Exercising Your Options the Euro Way 165

Tracking index settlement (the SET) 165

Cashing in with exercise 166

Satisfying Option Obligations 167

American-style stock options 167

Expiring uninspiring options 169

European-style options 171

Breaking It Down: American-Style Index Options 172

Exercising rights 172

Meeting obligations 173

Chapter 10 Protecting Your Portfolio with Options 175

Putting Protection on Long Stock 176

Combining puts with long stock 176

Weighing protection cost versus time 181

Limiting Short Stock Risk with Calls 183

Protecting a short stock position 183

Further reducing short stock risk 184

Hedging Your Bets with Options 185

Protecting a portfolio … partially 185

Protecting a portfolio … completely 188

Avoiding Adjusted Option Risk 190

Justifying option adjustments 191

Adjusting from adjustments 193

Chapter 11 Increasing Profit Potential and Decreasing Risk 195

Leveraging Assets to Reduce Risk 195

Determining your total dollars at risk 196

Relying on market timing 200

Combining Options to Reduce Risk 202

Spreading the risk with a debit trade 204

Spreading the risk with a credit trade 209

Chapter 12 Combination Strategies: Spreads and Other Wild Things 215

Combining Options with Stocks 215

Creating "covered" positions 216

Covering the covered call position 217

Reducing protected stock costs 219

Varying Vertical Spreads 222

Changing your vertical spread risk profile 222

Spreading time with calendars 223

Defining diagonal spreads 226

Chapter 13 ETFs, Options, and Other Sneaky Tricks 229

Exploring the Exchange-Traded Fund 229

Comparing ETFs to Indexes 230

Distinguishing ETF and index options 233

Reducing Portfolio Volatility with ETFs 236

Revisiting volatility 236

Investing with ETFs 239

Tilting Your Portfolio with Sector ETFs 246

Adding sector ETFs to a portfolio 246

Selecting the right approach 250

Part IV Advanced Strategies for Options Traders 253

Chapter 14 Making Money without Worrying About the Market's Direction 255

Limiting Directional Risk 255

Capitalizing on a big move 256

Reducing straddle risk and reward 262

Neutral View versus Neutral Position 264

Defining a neutral approach 265

Trading with Delta 266

Monitoring two key Greeks 267

Creating a delta neutral straddle 268

Understanding Trade Adjustments 271

Deciding when to adjust a trade 272

Deciding how to adjust a trade 272

Chapter 15 Letting Volatility Lead Trading Opportunities 275

Analyzing Implied Volatility Levels 275

It's al! relative but not overly scientific 276

When options are skewed 282

Understanding Ratio Spreads 285

Reviewing ratio spread risk profiles 286

Identifying best conditions for ratio spreads 290

Deciding your strategy 291

Using Ratio Backspreads 292

Defining ratio backspreads 293

Spotting best conditions for ratio backspreads 301

Chapter 16 Trading Profitably When Markets Move Sideways 305

Winning Positions in Sideways Markets 306

Managing existing positions 306

Option strategies for sideways moves 311

Understanding Butterfly Positions 313

Defining the long butterfly 314

Digging deeper into butterfly risk 322

Creating an iron butterfly 324

Understanding Condor Positions 328

Defining a condor spread 328

Recognizing condor risks 330

Part V The Part of Tens 333

Chapter 17 Ten Top Option Strategies 335

Married Put 336

Collar 337

Long Put Trader 338

LEAPS Call Investor 339

Diagonal Spread 340

Bear Call Credit Spread 341

Straddle 342

Call Ratio Backspread 344

Put Ratio Backspread 345

Long Put Butterfly 346

Chapter 18 Ten Dos and Don'ts in Options Trading 349

Do Focus on Managing Risk 349

Don't Avoid Losses 350

Do Trade with Discipline 351

Don't Expect to Remove Your Emotions 352

Do Have a Plan 352

Do Be Patient 353

Don't Suffer from Analysis Paralysis 354

Do Take Responsibility for Your Results 354

Don't Stop Learning 355

Do Love the Game 356

Index 357

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