The Complete Guide to Option Strategies

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1 The Complete Guide to Option Strategies Advanced and Basic Strategies on Stocks, ETFs, Indexes, and Stock Indexes MICHAEL D. MULLANEY WILEY John Wiley & Sons, Inc.

2 Contents Preface Acknowledgments xv xx PART ONE CHAPTER 1 Learning the Fundamentals Getting Ready to Trade CHAPTER 2 CHAPTER 3 Why Trade Options? Developing a Game Plan What Is an Option? Denning Key Terms Option Fundamentals Opening and Closing Positions Option Buying Option Selling Spreads Bid/Ask Spread Option Chain What Determines an Option's Price? Factors Affecting Option Pricing Forecasting Option Prices vii

3 viii CONTENTS CHAPTER 4 CHAPTER 5 CHAPTER 6 Tools of the Trade Greeks : Greek Basics Position Greeks Converting an Option Chain to Greeks More on Delta Buying versus Selling Comparing Long and Short Options Option Buying Option Selling Bullish versus Bearish Learning How to Roll Understanding Spread Terminology What Is a Spread? Spread Buying versus Selling Spread Strategy Summary PART TWO The Four Basic Option Strategies 87 CHAPTER 7 CHAPTER 8 CHAPTER 9 Long Call Long Put Short Call

4 Contents ix CHAPTER 10 Short Put PART THREE Spread Strategies 159 CHAPTER 11 Vertical Spread CHAPTER 12 Iron Condor ~ CHAPTER 13 CHAPTER 14 CHAPTER 15 Unbalanced Spreads Straddle and Strangle Butterfly Spread

5 CONTENTS ' CHAPTER 16 CHAPTER 17 CHAPTER 18 CHAPTER 19 CHAPTER 20 CHAPTER 21 Condor Spread Calendar Spread Diagonal Spread, Covered Call Strategy Example Combination Collar Strategy Example

6 Contents xi CHAPTER 22 Covered Combination Strategy Example PART FOUR Comparing Underlying Instruments 343 CHAPTER 23 CHAPTER 24 CHAPTER 25 CHAPTER 26 Comparing Stocks, ETFs, Indexes, and Stock Index Futures Size of Instrument Exercise and Assignment Margin Commission and Bid/Ask Taxes ETF Options -? What Is an ETF? ETF Options Stock Index Options What Is a Stock Index? Index Options Index Volatility Skew Index Time Decay Stock Index Futures Options What Is a Futures Contract? Stock Index Futures Option Bonus Section

7 xii CONTENTS PART FIVE Advanced Topics 391 CHAPTER 27 CHAPTER 28 CHAPTER 29 CHAPTER 30 CHAPTER 31 Assessing Volatility Comparison of Implied Volatilities How to Compare Volatility Response to Changing Conditions Market Volatility Gauges Volatility Skew Delta-Neutral Volatility Trading Consider Trading Volatility Index Options Exercise and Assignment American-Style Exercise European-Style Exercise Cash Settlement Automatic Exercise Spread Risks Likelihood of Exercise Assignment Risk Exercise and Assignment Procedures Risk Management Run It Like a Business Controlling Risk Margin Stock, ETF, Index, and Futures Margin Comparing Margin Margin Planning Interest Cash Accounts and IRAs Placing an Order Types of Option Orders

8 Contents xiii CHAPTER 32 APPENDIX A APPENDIX B Strategy: The Multistep Order Bid/Ask Spread Commissions Trading Platform Clearing of Trades Taxation of Options General Rules Option Taxation Tax Reduction for Broad-Based Index and Futures Options Internal Revenue Service Circular 230 Notice Strategies at a Glance ETFs Bullish ETF Strategies Bearish ETF Strategies Trading outside a Range Trading inside a Range Strategies at a Glance Indexes Bullish Index Strategies Bearish Index Strategies Trading outside a Range Trading inside a Range APPENDIX C Strategies at a Glance Stock Index Futures 515 Bullish Stock Index Futures Strategies Bearish Stock Index Futures Strategies Trading outside a Range Trading inside a Range Glossary About the Author Index

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