An Investors Guide to Trading Options (2013).pdf

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Puts and Calls
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Equity Options
•
Index
Options
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Time Decay
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Strategies
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LEAPS
®
VIRGINIA
B.
MORRIS
©2013 by Lightbulb Press, Inc. All Rights Reserved.
he Options Industry Council (OIC) is pleased to introduce
An Investor’s Guide to Trading Options,
a primer on options investing.
The guide clarifies options basics, explains the options marketplace,
and describes a range of strategies for trading options.
An Investor’s Guide
helps fulfill OIC’s ongoing mission to educate
the investing public and the brokers who serve them about the benefits
and risks of exchange listed options. We believe that education is the
key to sound and intelligent options investing, and that the tremendous
growth of the options market in recent years can be attributed, at least
in part, to the value of this education.
Formed in 1992 by the nation’s options exchanges and The Options
Clearing Corporation, OIC is your options education resource.
We are always available to answer your questions and to expand
your options knowledge. To contact OIC, please visit our website
at www.OptionsEducation.org or phone Investor Services at
1-888-OPTIONS.
The Options Industry Council
T
©2013 by Lightbulb Press, Inc. All Rights Reserved.
The information in this guide is provided for educational purposes. Neither The Options
Industry Council (OIC) nor Lightbulb Press is an investment adviser and none of the
information herein should be interpreted as advice.
For purposes of illustration, commission and transaction costs, tax considerations, and
the costs involved in margin accounts have been omitted from the examples in this book.
These factors will affect a strategy’s potential outcome, so always check with your broker
and/or tax adviser before engaging in options transactions.
The prices used in calculating the examples used throughout this guide are for illustrative
purposes and are not intended to represent official exchange quotes.
The options strategies described in this book are possibilities, not recommendations. No
strategy is a guaranteed success, and you are responsible for doing adequate research and
making your own investment choices. Please note: All equity options examples represent a
standard contract size of 100 shares.
Options are not suitable for all investors. Individuals should not enter into option transactions
until they have read and understood the risk disclosure document
Characteristics and Risks of
Standardized Options.
Copies of this document may be obtained from your broker, from any
exchange on which options are traded, or by contacting The Options Clearing Corporation, One
North Wacker Dr., Suite 500 Chicago, IL 60606 (888-678-4667). It must be noted that, despite the
efforts of each exchange to provide liquid markets, under certain conditions it may be difficult
or impossible to liquidate an option position. Please refer to the disclosure document for further
discussion on this matter.
LIghTbuLb PRESS
Project Team
Design Director
Kara W. Wilson
Editor
Mavis Wright
Production and Illustration
Thomas F. Trojan
SPECIAL ThAnKS TO
Bess Newman, Gary Kreissman
ARTWORK CREDITS
The image on page 30 ©2003 Lightbulb Press and its licensors. All rights reserved.
©2004, 2005, 2009, 2011, 2013 by LIghTbuLb PRESS, InC. ALL RIghTS RESERvED.
www.lightbulbpress.com
Tel. 212-485-8800
ISBN: 978-0-974038-62-9
No part of this book may be reproduced, stored, or transmitted by any means, including electronic,
mechanical, photocopying, recording, or otherwise, without written permission from the publisher, except
for brief quotes used in a review. While great care was taken in the preparation of this book, the author
and publisher disclaim any legal responsibility for any errors or omissions, and they disclaim any liability
for losses or damages incurred through the use of the information in the book. This publication is designed
to provide accurate and authoritative information in regard to the subject matter covered. It is sold with
the understanding that neither the author nor the publisher is engaged in rendering financial, legal,
accounting, or other professional service. If legal advice, financial advice, or other expert assistance is
required, the services of a competent professional person should be sought.
©2013 by Lightbulb Press, Inc. All Rights Reserved.
CONTENTS
AN INVESTOR’S
GUIDE TO
TRADING OPTIONS
ThE bASICS
5
What Is an Option?
7
How Does Options
11
Where Are Options Listed?
13
What Are the Benefits?
15
What Are the Risks?
17
How Do You Get Started?
19
Key Terms and Definitions
Trading Work?
9
On Which Securities Are
Options Offered?
I n v E S T I n g S T R AT E g I E S
21
Introduction to
23
25
27
29
31
33
Spread Strategies
35
Understanding Spreads
37
Collar Transactions
39
Exit Strategies
41
Rolling Up, Over, and Out
43
Index Options
45
Tax Considerations
Options Strategies
Selecting the Right Security
Call Buying
Call Writing
Put Buying
Put Writing
R E S E A R C h A n D I n F O R M AT I O n
47
Trading Options
49
Options Information Sources
51
Applying Options Information
53
Reading Options Charts
55
Options Chains
57
Option Symbology and Sources
59
Strategy Screener
and Analysis
gLOSSARy AnD InDEx
61
Glossary
63
Index
©2013 by Lightbulb Press, Inc. All Rights Reserved.
the basics
What Is an Option?
An option is a contract to buy or sell a
specific financial product officially known
as the option’s underlying instrument or
underlying interest. For equity options,
the underlying instrument is a stock,
exchange-traded fund (ETF), or similar
product. The contract itself is very precise.
It establishes a specific price, called the
strike price
, at which the contract may
be
exercised
, or acted on. And it has
an
expiration date
. When an option
expires, it no longer has value and no
longer exists.
Options come in two varieties,
calls
and
puts
, and you can buy or sell either
type. You make those choices—whether to
buy or sell and whether to choose a call or
a put—based on what you want to achieve
as an options investor.
Buying and selling
Types of opTions
ConTraCTs
Calls
If you buy a call, you have the right to buy
the underlying instrument at the strike
price on or before the expiration date. If
aT a premium
you buy a put, you have the right to sell
When you buy an option, the purchase
the underlying instrument on or before
price is called the
premium
. If you sell,
expiration. In either case, as the option
the premium is the amount you receive.
holder, you also have the right to sell the
The premium isn’t fixed and changes
option to another buyer during its term or
constantly—so the premium you pay
to let it expire worthless.
today is likely to be higher or lower than
The situation is different if you
write
,
the premium yesterday or tomorrow.
or sell, an option, since selling obligates
What those changing prices reflect is
you to fulfill your side of the contract if
the give and take between what buyers
the holder wishes to exercise. If you sell a
are willing to pay and what sellers are
call, you’re obligated to sell the under-
willing to accept for the option. The point
lying interest at the strike price, if you’re
at which there’s agreement becomes the
assigned. If you sell a put, you’re obligated
price for that transaction, and then the
to buy the underlying interest, if assigned.
process begins again.
As a writer, you have no control over
If you buy options, you start out with
whether or not a contract is exercised,
what’s known as a
net debit
. That means
and you need to recognize that exercise
you’ve spent money you might never
is always possible at any time until the
recover if you don’t sell your option at a
expiration date. But just as the buyer can
profit or exercise it. And if you do make
sell an option back into the market rather
money on a transaction, you must subtract
than exercising it, as a writer you can
the cost of the premium from any income
purchase an off-
you realize to find your net profit.
setting contract
As a seller, on the other hand, you
and end your
begin with a
net credit
because you col-
obligation to
meet the terms
of the contract.
WhaT’s a finanCial produCT?
The word
product
is more likely to conjure up images of
vegetables or running shoes than stocks or stock indexes.
Similarly,
instrument
might suggest a trombone or a
scalpel rather than a debt security or a currency. But both
terms are used to refer to the broad range of
investment vehicles.
©2013 by Lightbulb Press, Inc. All Rights Reserved.
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