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.
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 3 4 8 12 17 19 19 19 20 22 26 26 27 28 31 31 33 41 43 vii
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 45 45 54 55 56 62 65 65 66 69 70 73 73 76 77 77 78 83 86 PART TWO The Four Basic Option Strategies 87 CHAPTER 7 CHAPTER 8 CHAPTER 9 Long Call Long Put Short Call 91 91 93 104 107 109 109 111 122 124 125 125 127
Contents ix CHAPTER 10 Short Put 139 140 141 141 143 154 157 PART THREE Spread Strategies 159 CHAPTER 11 Vertical Spread 161 161 163 173 177 CHAPTER 12 Iron Condor ~ 179 179 180 188 189 CHAPTER 13 CHAPTER 14 CHAPTER 15 Unbalanced Spreads Straddle and Strangle Butterfly Spread 191 191 192 201 202 205 205 207 218 222 223 223 226
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 238 240 243 243 246 258 260 263 263 266 279 283 285 285 288 298 299 301 301 302 306 310 313 313 316 321 324 327 327 329 332 334
Contents xi CHAPTER 22 Covered Combination Strategy Example 335 335 338 341 342 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 345 345 346 347 348 349 351 351 353 353 353 354 362 363 363 364 364 370 370 371 373 373 375 379 385 389
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 393 393 398 399 401 406 407 414 415 416 417 417 420 421 422 423 425 427 429 430 431 433 433 438 448 449 449 450 459 460 462 462 464 465 465 466
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 471 472 475 476 476 476 479 479 480 482 485 485 487 488 492 497 499 503 503 506 508 510 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 515 519 523 525 Glossary About the Author Index 529 543 545