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Author(s): Joe Duarte

Series: For Dummies

Publisher: Wiley, Year: 2021

ISBN: 1119828309,9781119828303

Table of Contents v Table of Contents INTRODUCTION 1 About This Book 2 Foolish Assumptions 3 Icons Used in This Book 4 Beyond the Book 5 Where to Go from Here 5 PART 1: GETTING STARTED WITH OPTIONS TRADING 7 CHAPTER 1: Options Trading and You, the Individual Investor 9 Rewiring Your Thinking 10 Preparing to Trade: Take a Pre-Trading Flight Check 11 Understanding Options 12 Getting the complete picture 13 Knowing option essentials 14 Trying different strategies before deploying them in real time 16 Putting options in their place 18 Differentiating between Option Styles 19 Using options to limit your risk 19 Applying options to sector investing 20 Using Options in Challenging Markets 21 Reducing your directional bias and making money in flat markets 21 Controlling your emotions 21 CHAPTER 2: Introducing Options 23 Understanding Option Contracts 23 Tuning in to option basics 24 Comparing options to other securities 26 Valuing Options 27 Knowing your rights and obligations as an options trader 28 Identifying useful terms of endearment 28 Making Sense of Options Mechanics 30 Identifying options 30 Rotating with the expiration cycle 31 Making a decision: Expiration time is key 32 Detailing your rights 33 vi Options Trading For Dummies Creating Option Contracts out of Thin Air 33 Opening and closing positions 34 Selling an option you don’t own 35 Keeping Some Tips in Mind 36 CHAPTER 3: Trading Places: Where the Action Happens 39 Identifying the U.S. Options Exchanges 40 Navigating the Markets 40 Executing trades 41 Naming the option market participants 42 Eyeing transactions and orders unique to options 43 Making sure you know these trading rules 44 Weighing Option Costs and Benefits 47 Recognizing option risks 47 Identifying costs unique to options 48 Valuing options benefits 49 Grasping Key Option Pricing Factors 52 Introducing option Greeks 53 Connecting past movement to the future 54 CHAPTER 4: Identifying Option Risks and Rewards 57 Understanding Your Trading Risks 58 Risking money with stocks 58 Calculating option risks 61 Reaping Your Rewards 62 Benefiting from stocks 62 Breaking even with options 63 Profiling Risk and Reward 65 Profiling stock trades with risk graphs 66 Profiling option trades with risk graphs 67 Combining option positions 69 Considering the worst-case scenario 71 PART 2: EVALUATING MARKETS, SECTORS, AND STRATEGIES 73 CHAPTER 5: Looking Closer Inside the Algo-Controlled Market 75 Considering a Few Words about Select Macro Factors 76 Assessing the Market’s (the Algos’) Bias 77 Judging the strength of a move 78 (Psycho)-analyzing the market 84 Watching Call and Put Extremes 87 Understanding put/call ratios 88 Table of Contents vii Using Volatility to Measure Fear 90 Measuring volatility 90 Recognizing impact from changing volatility 90 Spelling fear the Wall Street way: V-I-X 91 CHAPTER 6: Sector Analysis: Technical and Fundamental 93 Getting Technical with Charts 94 Understanding chart basics 94 Adjusting your time horizon for the best view 95 Visualizing supply and demand 96 Identifying Relatively Strong Sectors 99 Relative ratios 99 Rate of change indicator 102 Using Sector Volatility Tools 104 Displaying volatility with indicators 105 Analyzing volatility with Bollinger Bands 109 Projecting Prices for Trading 111 Support and resistance 111 Trends 113 Channels 115 Price retracements and extensions 117 Projections and probabilities 119 CHAPTER 7: Practicing Before You Swing 123 Monitoring Option Greek Changes 124 Tracking premium measures 124 Changing volatility and option prices 126 Making Sense of Paper Trading 128 Eyeing the pros and cons to paper trading 128 Implementing electronic paper trades 129 Using Trading Systems 130 Knowing what you’re getting 130 Performing a backtest 131 Adding risk management to a backtest 135 Mastering Your Strategies 137 Setting the right pace 137 Achieving mastery through longevity 139 CHAPTER 8: Designing a Killer Trading Plan 143 Developing a Reliable Plan 144 Managing Your Costs 145 Optimizing Order Execution 147 Understanding option orders 148 Entering a new position 152 Executing a quality trade 155 Exiting an existing position 157 viii Options Trading For Dummies PART 3: WHAT EVERY TRADER NEEDS TO KNOW ABOUT OPTIONS 161 CHAPTER 9: Getting to Know Different Option Styles 163 Delving Deeper into Index Options 163 Getting to the nitty-gritty of indexes 164 Capitalizing on an index with options 166 Watching Out for Style Risk 169 American-style options 169 European-style options 170 Considering the exceptions 171 Exercising Your Options, American Style 173 Knowing the nuts and bolts 173 What you see is what you get 174 To exercise or not, that is the question 174 Exercising Your Options the Euro Way 175 Tracking index settlement (the SET) 175 Cashing in with exercise 176 Satisfying Option Obligations 176 American-style stock options 177 Expiring options 179 European-style options 182 Breaking It Down: American-Style Index Options 182 Exercising rights 183 Meeting obligations 183 CHAPTER 10: Protecting Your Portfolio with Options 185 Putting Protection on Long Stock 186 Combining puts with long stock 186 Weighing protection cost versus time 191 Limiting Short Stock Risk with Calls 194 Protecting a short stock position 194 Further reducing short stock risk 195 Hedging Your Bets with Options 196 Protecting a portfolio . . . partially 197 Protecting a portfolio . . . completely 200 Avoiding Adjusted Option Risk 203 Justifying option adjustments 203 Adjusting from adjustments 205 CHAPTER 11: Increasing Profit Potential and Decreasing Risk 207 Leveraging Assets to Reduce Risk 208 Determining your total dollars at risk 208 Relying on market timing 213 Table of Contents ix Combining Options to Reduce Risk 216 Spreading the risk with a debit trade 217 Spreading the risk with a credit trade 223 CHAPTER 12: Combination Strategies: Spreads and Other Wild Things 229 Combining Options with Stocks 230 Creating covered positions 230 Covering the covered call position 232 Reducing protected stock costs 235 Varying Vertical Spreads 237 Changing your vertical spread risk profile 238 Spreading time with calendars 239 CHAPTER 13: Understanding ETFs, Options, and Other Useful Tricks 245 Exploring the Exchange-Traded Fund 246 Comparing ETFs to indexes 246 Distinguishing ETF and index options 250 Reducing Portfolio Volatility with ETFs 253 Revisiting volatility 253 Investing with ETFs 259 Tilting Your Portfolio with Sector ETFs 266 Adding sector ETFs to tilt your portfolio 267 Selecting the right strategy 271 PART 4: ADVANCED STRATEGIES FOR OPTIONS TRADERS 273 CHAPTER 14: Making Money without Worrying About the Market’s Direction 275 Limiting Directional Risk 276 Capitalizing on a big move — A straddle 276 Reducing straddle risk and reward — A strangle 282 Examining a Neutral View versus a Neutral Position 285 Identifying neutral positions 286 Calculating delta for combination positions 287 Trading with Delta 288 Monitoring two key Greeks 288 Creating a delta-neutral straddle 289 Understanding Trade Adjustments 293 Deciding when to adjust a trade 293 Deciding how to adjust a trade 294 x Options Trading For Dummies CHAPTER 15: Letting Volatility Show You the Way to Trading Opportunities 295 Analyzing Implied Volatility Levels 296 It’s all relative but not overly scientific 296 When options are skewed 303 Understanding Ratio Spreads 306 Reviewing ratio spread risk profiles 306 Identifying best conditions for ratio spreads 310 Deciding your strategy 311 Using Ratio Backspreads 313 Defining ratio backspreads 313 Spotting best conditions for ratio backspreads 321 CHAPTER 16: Trading Profitably When Markets Move Sideways 325 Identifying Winning Positions in Sideways Markets 326 Managing existing positions 326 Identifying other option strategies for sideways moves 331 Understanding Butterfly Positions 334 Defining the butterfly 334 Digging deeper into butterfly risk 343 Creating an iron butterfly 345 Understanding Condor Positions 349 Defining a condor spread 349 Recognizing condor risks 351 PART 5: THE PART OF TENS 355 CHAPTER 17: Ten Top Option Strategies 357 Married Put 358 Collar 359 Long Put Trader 361 LEAPS Call Investor 362 Diagonal Spread 363 Bear Call Credit Spread 365 Straddle 366 Call Ratio Backspread 367 Put Ratio Backspread 369 Long Put Butterfly 370 Table of Contents xi CHAPTER 18: Ten Do’s and Don’ts in Options Trading 373 Do Focus on Managing Risk 374 Don’t Avoid Losses 375 Do Trade with Discipline 375 Don’t Expect to Remove Your Emotions 376 Do Have a Plan 377 Do Be Patient 378 Don’t Suffer from Analysis Paralysis 379 Do Take Responsibility for Your Results 380 Don’t Stop Learning 381 Do Love the Game 382 INDEX 383

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