Book Description Even for the experienced trader, options trading can be a risky and intimidating investment strategy. However, with the right strategies and approach, it can be an exciting investment option that can pay serious dividends. Through logical, step-by-step guidance Idiot's Guides: Options Trading gives you the tools you need to reduce risk, while boosting the odds for success with these volatile and unpredictable investments. You will learn about all of the common types of options including index, ETF, and equity options, and then move into newer strategies including binary options and the new 20-minute options. Idiot's Guides: Options Trading will help you decide how to choose the approach that fits your investment strategies, how to weigh option costs and benefits, understand options contracts, use technical analysis to evaluate opportunities, and how to minimize risk while building a strategy that maximizes gains while protecting against market fluctuations. Show and hide more
Table of Contents
Cover Title Page Copyright Page Introduction Part 1: Introduction to Options Trading 1 All About Options What Are Options? Why Options Exist Insurance Leverage Speculation Basic Options Terminology Puts and Calls Bid and Ask Long and Short Strike Price Expiration Date American and European Options Underlying Securities Commodity Options Equity Options Index Options Interest Rate Options Miscellaneous Options 2 How Options Work Reading the Quotes Basics of Orders Option Transactions Basic Order Types Advanced Order Types Floor Execution Marking to Market and Margin Moneyness Open Interest Expiration and Exercise Expiration Exercise Delivery and Settlement Extrinsic and Intrinsic Value Relationships Among Options Options Cycle 3 Exchanges, Brokers, and Other Market Institutions Pricing and Trading Structures for Options The Role of Market Makers The Order of Trade Price Improvement Where to Trade Options Options Exchanges in the United States Over-the-Counter Options Finding a Broker Commissions and Trade Execution Position Limits Choosing a Software Platform Futures Commission Merchants Signing the Options Agreement Other Institutions in the Options Game Options Clearing Corporation Options Industry Council The Regulators 4 The Greeks Delta Delta in Pictures Delta in Use Gamma Theta Other First Derivatives Vega Rho How to Use the Greeks Part 2: Options Valuation and Trading Strategies 5 The Basics of Options Valuation Put-Call Parity Basics of Valuation Understanding Pricing with the Binomial Option Model Pricing in Detail with the Black-Scholes Model Value of the Underlying Time Value Interest Rates Volatility American or European? The Effect of Dividends Putting Together the Black-Scholes Model Heston Volatility Model 6 The VIX and Other Market Indicators Working with Volatility, Implied and Otherwise Sentiment Put-Call Ratio Put and Call Volume Indicators Premium Levels Confidence Index Implied Volatility The VIX Calculating the VIX Using the VIX Extending the VIX Concept Using Indicators Bullish Strategies Neutral Strategies Bearish Strategies 7 Beginning Options Trading How to Open an Account The Options Agreement Margin Accounts Accounting in Your Account What Do You Want to Do? Simple Speculative Strategies Covered Calls Playing a Hunch with Weeklys and Binary Options Writing Deep Out-of-the-Money Puts Reducing Transaction Costs with the Wheel Trade Hedging Closing Out Your Position Offsetting Trades Expiring Worthless Exercise and Assignment What About Employee Stock Options? 8 Call Strategies Basic Uses of Calls Why Use Long Calls Being Short a Call The Call and Its Premium Call Strategies Writing Covered Calls Writing Naked Calls Replacement Therapy Call Spreads Butterfly Spreads Condors How to Think About Calls 9 Put Strategies Basic Uses of Puts Long Put Strategies Short Put Strategies The Put and the Premium Put Strategies Protective Puts Naked Puts Put Spreads Married Puts Butterflies Condors How to Think About Puts 10 Combination Strategies Combination Spreads Back Spread Christmas Tree Spread Box Spread Straddles and Strangles Straddles Short Straddle Strangles Iron Butterflies and Iron Condors Collars and Fences Rolls, Jelly and Plain Strips and Straps Repair Strategies Option Repair Stock Repair Part 3: Advanced and Synthetic Strategies 11 Futures, Forwards, and Related Derivatives Defining Futures Types of Futures Contracts Options on Futures Forward Contracts Environmental Credits Swaps Currency Swaps Interest Rate Swaps Commodity Swaps Swaptions Collateralized Debt Obligations Credit Default Swaps Repurchase Agreements LEAPS and Weeklys 12 Synthetic Securities Setting Up Synthetics A Synthetic Stock Long Synthetic Stock Short Synthetic Stock Synthetic Options A Synthetic Call Long Synthetic Call Short Synthetic Call A Synthetic Put Long Synthetic Put Short Synthetic Put The Role of Interest A Reminder About Volatility Synthetics and Moneyness What’s the Downside? Why and How to Use Synthetics Can’t Borrow Shares to Short No Exchange-Traded Product Greater Efficiency on Some Hedges 13 Arbitrage The Law of One Price Arbitrage Strategies Simple Arbitrage Option Arbitrage Scalping Synthetic Securities Conversion Arbitrage Reversal Box Spreads Interest Rate Arbitrage Index Arbitrage Merger Arbitrage Commissions, Taxes, and Other Considerations Commissions Dividends Interest Taxes Problems and Downsides of Arbitrage Pin Risk High-Frequency Trading 14 Technical Analysis The Basics of Technical Analysis Intermediate Technical Analysis Trendlines Moving Averages Breakouts Volatility Reversals Basic Chart Patterns Pennants and Flags Head-and-Shoulders Cup-and-Handle Gaps Theories of Technical Analysis Fibonacci and Elliott Wave Candlestick Charting Gann Putting It All Together 15 Fundamental Analysis Why Analysis Matters Starting with the Macroeconomy U.S. Data Sources Global Data Sources Analyzing the Underlying Asset Single-Stock Options Financial Products Commodities Looking at the Calendar Fundamental Analysis in Options Trading Putting It All Together 16 Research Services Determining Your Needs Your Trading Style What Drives Your Market How You Learn Research Relative to Performance Types of Research Services Data Research and Analytics Trade Ideas Training Evaluating the Services Running Some Background Checks Are They Running a Service or a Sales Pitch? Using Your Broker Buyer Beware Part 4: The Business of Trading 17 Trade Planning Pick Your Markets Pick Your Timeframe Set Your Goals Are You Beginning or Advanced? Are You Speculating or Hedging? Return Targets The Probability of Ruin Risk Limits Time and Attention Cash Management Fixed Fractional Fixed Ratio Gann Kelly Criterion Martingale Value at Risk Cost of Carry Plan Your Trade … How Much Money? Why Trade? For How Long? … and Trade Your Plan Order Execution Sticking to Your Limits Keep a Trade Diary Managing Your Profits Compounding Returns with the Same Strategy Pyramiding Taking Money Off the Table 18 Taxes Income and Capital Gains Proceeds and Basis How Options Affect the Tax Basics The Tax Rates, Applied Dividends Capital Gains Interest Income Closing an Option Position Using an Offsetting Position Assignment or Exercise: Call Edition Assignment or Exercise: Put Edition Worthless Expiration Straddles Antistraddle Rules The Explanation Antistraddle and Offset Rule Exemptions Who Are You, Anyway? Investors Dealers Traders Options in Retirement Accounts Deducting Investment Expenses Research and Advice How to Handle Commissions Investment Interest The One Expense You Can’t Deduct Hiring a Tax Adviser Types of Tax Advisers Special Considerations for Traders State Taxes 19 Evaluating Performance Learn About Options, Not Strategies Testing Before You Trade Backtesting Simulation Tracking Trades A Simple Trading Diary Spreadsheet Setting Up a P&L Calculating Overall Performance Types of Return Risk Calculation Benchmarking Performance One Final Note 20 Training Your Brain Controlling Your Emotions Doubt Fear Greed Overconfidence Anxiety Boredom Depression Importance of a Trading Plan Trading as a Thoughtful Endeavor Evaluate Your Plan Learning, Without Emotion Having an Outlet Balancing Life A Walk-Away Fund If You Have a Problem Appendixes A Glossary B Resources About the Author
