Options Trading Strategies: Complete Guide to Getting... (PDF) (2024)

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    Summary Options Trading Strategies: Complete Guide to Getting Started and Making Money with Stock Options

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    Options Trading StrategiesComplete Guide to Getting Started and Making Moneywith Stock OptionsScott J. DanesDylanna Publishing

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    Copyright © 2014 by Scott J. DanesAll rights reserved. This book or any portion thereofmay not be reproduced or used in any manner whatsoever without the expresswritten permission of the publisher except for the use of brief quotations in abook review.Dylanna PublishingFirst edition: 2014DisclaimerThis book is for informational purposes only. The views expressed are those ofthe author alone, and should not be taken as expert, legal, or medical advice. Thereader is responsible for his or her own actions.Every attempt has been made to verify the accuracy of the information in thispublication. However, neither the author nor the publisher assumes anyresponsibility for errors, omissions, or contrary interpretation of the materialcontained herein.Neither the author or the publisher assumes any responsibility or liabilitywhatsoever on the behalf of the reader or purchaser of this material.

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    ContentsIntroductionOptions 101What Are Options?Buying and Selling OptionsAdvantages of Options TradingLeverageRisk Limitation—HedgingDisadvantages of Options TradingLevels of RiskIntrinsic ValueTime DecayTaxesTypes and Styles of OptionsCall OptionsPut OptionsUsing Call and Put Options to Make a ProfitStyles of OptionsAmerican OptionsEuropean OptionsExotic OptionsLEAPSIndex OptionsOption Prices and ValuationIn-The-Money (ITM)At-The-Money (ATM)Out-of-The-Money (OTM)Intrinsic Value versus Time ValueOption Pricing ModelsBlack-Scholes ModelCox-Rubenstein Binomial Option Pricing ModelPut/Call ParityGetting to Know the GreeksDeltaGammaRho

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    VegaThetaGetting Started with Trading OptionsOptions ExchangesOptions Clearing Corporation (OCC)Opening a Trading AccountPlacing Your OrderOrder TypesTypes of Fill OrdersTiming OrdersUnderstanding Options ChainsMaking TradesTrading ToolsOption Trading StrategiesSimple StrategiesCall BuyingPut BuyingCovered CallMarried PutSpreadsBull Call SpreadBear Put SpreadCalendar/Time SpreadButterfly SpreadStraddle (Long)Iron CondorIron ButterflyNaked CallsCollars (Protective)Strangle (Long)Strategies by Market OutlookNeutral StrategiesStrategies for BullsStrategies for BearsExit StrategiesClosing OutRolling OutExercising OptionsSources of InformationOnline ResourcesApps

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    Newspapers, Magazines, and NewslettersNewspapersNewslettersMagazinesTips and Tricks for Avoiding Costly MistakesGlossary

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    IntroductionNovice, and even experienced, investors are often wary of investing in options.Many people view options as risky, exotic, and only for investors with largebankrolls. However, nothing could be further from the truth. Options are a greatway for all investors, regardless of experience or risk tolerance, to expand theirportfolios and make money in the stock market—whether the market is going upor down.Options are the perfect vehicle for increasing your leverage, allowing you to turna small investment into exponentially large rewards. They can also be used as aninsurance policy, protecting your investments in case of a market downturn. Inshort, options are a tool that every investor should understand and potentially putto use.In this book, you’ll learn all the ins and outs of stock options, from basic putsand calls to more exotic straddles and spreads. By the end of this guide, you’llhave a complete understanding of trading options and be able to put them to usein your own portfolio implementing both simple and more advanced strategies.Included are many real world and easy to follow examples so you will be able toclearly understand each of the principles and strategies discussed in action.Finally, we’ll delve a little into the psychology of investing and its importance inknowing which way the market is going and how this can help you better timeyour investments for even more profits.Read on to get started in the exciting world of options trading.

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    Options 101There are many different options for investing and many types of financialinstruments that can be used to accomplish your goal of making profits. One keyfinancial tool that savvy investors and traders use is options.As with stocks, options can make a person considerable earnings. They are,however, much more versatile and dynamic than stocks. How so? Well, whentrading stocks there are really only two ways to make money. You can go “long”by buying a particular stock and waiting for it to go up in value and if that occursyou can sell it for a profit. The other way to turn a profit is to go “short.” In thiscase, you sell shares of a company and buy them back later at a lower price.Options trading is much more dynamic with dozens of different ways to makepotential profits. Investors can trade options not only on stocks but also oncurrencies, commodities, and various indices. Many novice investors enter intothe stock market without the proper education and experience. These investorsare missing out on considerable earnings by not trading options on the abovevehicles.Options are available today on most stock exchanges and can be purchasedthrough low-cost online brokers. Although trading options needs a well thoughtout and comprehensive approach, you can certainly make a profit if you arededicated and committed.This book will guide you through the various types of options and strategiesinvolved and, hopefully, allow you to make considerable profits on your investedcapital. Understanding options trading is important not only for sophisticatedinvestors but also for beginning traders who want to strengthen their investmentportfolio.What Are Options?An option is a contract that gives the purchaser the right, but not the obligation,to buy or sell an underlying asset at a specific price on or before a certain date.An option, just like a stock or bond, is a type of security. It is also a bindingcontract with strictly defined terms and properties.

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    Basically, a stock option contract may be in two forms: call options and putoptions. In both cases you have the right, but not the requirement, to either buyor sell the underlying stock for a predetermined price. The predetermined priceis also known as the strike price.An important feature of options, regardless of type, is the expiration date—adate when the option expires and becomes worthless. Before the expiration date,investors can hand over the option to someone else during the month in order tomake a profit. However, due to time decay as well as other reasons, the optionwill lose value the closer it gets to the expiration date.As an example, say on June 1, 2015, company ABC is trading for $10 per share.You could buy a call option on that stock that would allow you to buy 100 sharesat a given time (say August 23, 2015) for $12 per share. Why would you want todo this? Well you may think that company ABC is underpriced and headingupward. So you buy your option and you wait. If 45 days later company ABC isnow trading for $15 per share, then you can exercise your option to buy the stockat $12 and you have made a significant profit. If, however, company ABC istrading below $12 then you would not exercise your option and they wouldexpire worthless. You have now lost your initial investment.In option terminology, the premium is the price of the option contract. It is inconstant flux based on market conditions and what the underlying security isdoing. The premium is equal to the intrinsic value (the amount the option is in-the-money) + the time value (the longer the time left until the expiration date,the higher the value). When you sell your option, you must deduct the amount ofthe premium from your profit.

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    Buying and Selling OptionsIn option trading, you can either be the buyer or the seller of the option.If you buy a call option, then you have purchased the right to buy the underlyingstock (or other underlying instrument) at the specific strike price on or before theexpiration date of the option. If you have purchased a put option then you havethe right to sell the stock at the strike price on or before the expiration date. Inboth cases, you can also sell the option itself to another buyer or let it expire.A different scenario is when you sell, or write, options. In these cases, you areobligated to fulfill the terms of the option contract should the buyer wish toexercise it. So, if you sell a call option, you will have to sell the underlying assetat the strike price to the buyer. And in the case of a put option, you would haveto buy the stock at the strike price. If you write options then you need tounderstand that it is up to the buyer whether or not the contract is exercised andyou must be ready to fulfill the terms of the contract. However, it is possible tobuy another contract to offset your obligation and in this way you can exit out ofthe deal.

    As an enthusiast and expert in options trading, I can confidently delve into the content of the provided article, "Options Trading Strategies: Complete Guide to Getting Started and Making Money with Stock Options" by Scott J. Danes. My expertise in financial markets and options trading allows me to provide insights into the concepts discussed in the book.

    1. Options 101:

      • What Are Options? Options are financial contracts that provide the holder with the right (but not the obligation) to buy or sell an underlying asset at a specific price within a specified timeframe.

      • Buying and Selling Options:

        • Call Options: Grant the right to buy the underlying asset.
        • Put Options: Grant the right to sell the underlying asset.
      • Advantages of Options Trading:

        • Leverage: Options allow for increased leverage, turning a small investment into potentially large rewards.
        • Risk Limitation—Hedging: Options can be used as an insurance policy to protect investments in case of a market downturn.
      • Disadvantages of Options Trading:

        • Levels of Risk: Options trading involves various levels of risk.
      • Intrinsic Value and Time Decay:

        • Intrinsic Value: The actual value of an option if it were to be exercised immediately.
        • Time Decay: Options lose value over time, especially as they approach the expiration date.
      • Types and Styles of Options:

        • Call Options and Put Options: Basic forms of options.
        • American Options and European Options: Differ in when they can be exercised.
        • Exotic Options and LEAPS: More complex and long-term options.
      • Option Prices and Valuation:

        • In-The-Money (ITM), At-The-Money (ATM), Out-of-The-Money (OTM): Describe the relationship between the option's strike price and the current market price.
        • Option Pricing Models: Black-Scholes Model, Cox-Rubenstein Binomial Option Pricing Model, Put/Call Parity.
        • Getting to Know the Greeks: Delta, Gamma, Rho, Vega, Theta.
    2. Getting Started with Trading Options:

      • Options Exchanges and Clearing Corporation (OCC): Where options are traded and cleared.
      • Opening a Trading Account and Placing Your Order:
        • Order Types: Different ways to place orders.
        • Timing Orders: Timing considerations in options trading.
        • Understanding Options Chains: Visual representation of available options.
    3. Option Trading Strategies:

      • Simple Strategies:
        • Call Buying and Put Buying: Basic bullish and bearish strategies.
        • Covered Call and Married Put: Combining options with stock positions.
      • Spread Strategies:
        • Bull Call Spread and Bear Put Spread: Strategies involving multiple options.
        • Calendar/Time Spread and Butterfly Spread: Strategies based on time and volatility.
        • Straddle (Long), Iron Condor, Iron Butterfly, Naked Calls: Advanced strategies with various risk profiles.
    4. Exit Strategies:

      • Closing Out, Rolling Out, Exercising Options: Ways to exit or manage options positions.
    5. Sources of Information:

      • Online Resources, Apps, Newspapers, Magazines, and Newsletters: Various sources for market information.
    6. Tips and Tricks for Avoiding Costly Mistakes:

      • Glossary: Definitions of key terms in options trading.

    By understanding and applying the concepts outlined in this comprehensive guide, investors can navigate the complex world of options trading and potentially enhance their investment portfolios.

    Options Trading Strategies: Complete Guide to Getting... (PDF) (2024)

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