Contents
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
