OptionsTrading

StrategiesCompleteGuidetoGettingStartedandMakingMoneywith

StockOptions

ScottJ.Danes

DylannaPublishing

Copyright©2014byScottJ.

DanesAllrightsreserved.Thisbook

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DylannaPublishing

Firstedition:2014

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ContentsIntroductionOptions101

WhatAreOptions?

BuyingandSellingOptions

AdvantagesofOptionsTradingLeverageRiskLimitation—Hedging

Disadvantages of OptionsTrading

LevelsofRisk

IntrinsicValueTimeDecayTaxes

TypesandStylesofOptionsCallOptions

PutOptions

UsingCall andPutOptions toMakeaProfit

StylesofOptionsAmericanOptionsEuropeanOptionsExoticOptionsLEAPSIndexOptions

OptionPricesandValuation

In-The-Money(ITM)

At-The-Money(ATM)

Out-of-The-Money(OTM)

Intrinsic Value versus TimeValue

OptionPricingModelsBlack-ScholesModelCox-Rubenstein BinomialOptionPricingModelPut/CallParity

GettingtoKnowtheGreeksDelta

Gamma

Rho

Vega

Theta

GettingStartedwithTradingOptions

OptionsExchanges

Options Clearing Corporation(OCC)

OpeningaTradingAccount

PlacingYourOrderOrderTypesTypesofFillOrdersTimingOrders

UnderstandingOptionsChains

MakingTrades

TradingTools

OptionTradingStrategiesSimpleStrategies

CallBuyingPutBuyingCoveredCallMarriedPut

SpreadsBullCallSpreadBearPutSpreadCalendar/TimeSpreadButterflySpread

Straddle(Long)

IronCondor

IronButterfly

NakedCalls

Collars(Protective)

Strangle(Long)

StrategiesbyMarketOutlookNeutralStrategiesStrategiesforBullsStrategiesforBears

ExitStrategiesClosingOutRollingOutExercisingOptions

SourcesofInformationOnlineResources

Apps

Newspapers, Magazines, andNewsletters

NewspapersNewslettersMagazines

TipsandTricksforAvoidingCostlyMistakesGlossary

IntroductionNovice, and evenexperienced, investors areoften wary of investing inoptions. Many people viewoptions as risky, exotic, andonly for investors with largebankrolls. However, nothingcould be further from thetruth.Optionsareagreatwayforallinvestors,regardlessofexperience or risk tolerance,

toexpandtheirportfoliosandmake money in the stockmarket—whether the marketisgoingupordown.

Options are the perfectvehicle for increasing yourleverage,allowingyoutoturna small investment intoexponentially large rewards.They can also be used as aninsurance policy, protectingyourinvestments incaseofamarket downturn. In short,

options are a tool that everyinvestor should understandandpotentiallyputtouse.

In this book, you’ll learn allthe ins and outs of stockoptions, from basic puts andcalls tomoreexoticstraddlesand spreads. By the end ofthis guide, you’ll have acomplete understanding oftradingoptionsandbeabletoput them to use in your ownportfolio implementing both

simple and more advancedstrategies.

Includedaremanyrealworldand easy to follow examplessoyouwillbeable toclearlyunderstand each of theprinciples and strategiesdiscussedinaction.

Finally, we’ll delve a littleinto the psychology ofinvesting and its importancein knowing which way themarket isgoingandhowthis

canhelpyoubettertimeyourinvestments for even moreprofits.

Read on to get started in theexciting world of optionstrading.

Options101There are many differentoptions for investing andmany types of financialinstruments that can be usedto accomplish your goal ofmaking profits. One keyfinancial tool that savvyinvestors and traders use isoptions.

As with stocks, options can

make a person considerableearnings. They are, however,much more versatile anddynamic than stocks. Howso?Well,whentradingstockstherearereallyonlytwowaystomakemoney. You can go“long”bybuyingaparticularstockandwaitingfor it togoupinvalueandifthatoccursyou can sell it for a profit.Theotherwaytoturnaprofitis to go “short.” In this case,yousellsharesofacompany

and buy themback later at alowerprice.

Optionstradingismuchmoredynamic with dozens ofdifferent ways to makepotential profits. Investorscantradeoptionsnotonlyonstocksbutalsooncurrencies,commodities, and variousindices. Many noviceinvestors enter into the stockmarket without the propereducation and experience.

These investors are missingout on considerable earningsbynot tradingoptionson theabovevehicles.

Options are available todayonmoststockexchangesandcan be purchased throughlow-cost online brokers.Although trading optionsneeds awell thoughtout andcomprehensiveapproach,youcancertainlymakeaprofit ifyou are dedicated and

committed.

This book will guide youthrough the various types ofoptions and strategiesinvolved and, hopefully,allow you to makeconsiderable profits on yourinvested capital.Understanding optionstrading is important not onlyforsophisticatedinvestorsbutalso for beginning traderswhowant to strengthen their

investmentportfolio.

WhatAreOptions?

An option is a contract thatgives thepurchaser the right,butnot theobligation, tobuyor sell an underlying asset ataspecificpriceonorbeforeacertain date. An option, justlikeastockorbond,isatypeof security. It is also abinding contract with strictlydefinedtermsandproperties.

Basically, a stock option

contractmaybeintwoforms:call options and put options.In both cases you have theright,butnottherequirement,to either buy or sell theunderlying stock for a pre-determined price. The pre-determined price is alsoknownasthestrikeprice.

An important feature ofoptions,regardlessoftype, isthe expiration date—a datewhen the option expires and

becomes worthless. Beforethe expiration date, investorscan hand over the option tosomeone else during themonth in order to make aprofit. However, due to timedecay as well as otherreasons, the option will losevalue thecloser itgets to theexpirationdate.

As an example, say on June1, 2015, company ABC istrading for $10 per share.

You could buy a call optiononthatstockthatwouldallowyou to buy 100 shares at agiven time (say August 23,2015)for$12pershare.Whywould you want to do this?Well you may think thatcompanyABCisunderpricedand heading upward. So youbuyyouroptionandyouwait.If 45 days later companyABC is now trading for $15per share, then you canexercise your option to buy

thestockat$12andyouhavemade a significant profit. If,however, company ABC istrading below $12 then youwould not exercise youroptionandtheywouldexpireworthless.Youhavenowlostyourinitialinvestment.

In option terminology, thepremium is the price of theoption contract. It is inconstantfluxbasedonmarketconditions and what the

underlying security is doing.The premium is equal to theintrinsic value (the amounttheoptionis in-the-money)+thetimevalue(thelongerthetime left until the expirationdate, the higher the value).When you sell your option,you must deduct the amountof the premium from yourprofit.

Buying and SellingOptions

In option trading, you caneither be the buyer or theselleroftheoption.

Ifyoubuyacalloption,thenyou have purchased the rightto buy the underlying stock(or other underlyinginstrument) at the specificstrike price on or before theexpirationdate of theoption.

If you have purchased a putoptionthenyouhavetherightto sell the stock at the strikeprice on or before theexpirationdate.Inbothcases,you can also sell the optionitselftoanotherbuyerorletitexpire.

A different scenario is whenyousell,orwrite,options. Inthesecases,youareobligatedto fulfill the terms of theoption contract should the

buyerwish toexercise it.So,if you sell a call option, youwill have to sell theunderlying asset at the strikepricetothebuyer.Andinthecase of a put option, youwould have to buy the stockat the strike price. If youwrite options then you needto understand that it is up tothe buyer whether or not thecontract is exercisedandyoumust be ready to fulfill theterms of the contract.

However,itispossibletobuyanother contract to offsetyour obligation and in thisway you can exit out of thedeal.

AdvantagesofOptionsTrading

Once you get a handle onoption basics, you willdiscoverthattherearequiteafewadvantagestousingthemboth to increase leverageandto hedge against potentialthreats.

Leverage

Perhaps the main advantageof options is the ability tomake large profits without aconsiderable amount ofupfrontcapital.Thisisduetotheuseofleverage.Financialleverage is one of the mostsignificant aspects of tradingin options. This factor cangive an investor a biggerreturn while using aminimum amount of capitalin the initial stage ofinvestment.

For example, if you have$1,000toinvestwithandyoubought stock in companyXYZ that is currently sellingat $10 per share, then youwould be able to purchase100 shares. If the stock risesto $12.50 you could sell thestock and make a profit of$250 for a return of 25percent on your initialinvestment. (For simplicity,we will leave out brokeragecommissions in this

example.)

Incontrast,bybuyingoptionson the stock and usingleverage your returns couldbesignificantlyhigher.Ifyoubought call options on theabove stock with a strikeprice of $10 for $10 each,then you could by 100options which would allowyou to buy 1,000 shares ofstock. If the stock rises to$12.50 then you could

exercise your option to buythe shares at $10 and thenimmediately resell them for$12.50. In this case yourprofit would be $1,500 (or a150% return) on the sameinitial$1,000investment.

Thatisthepowerofleverage.With options, a trader canmake investments withoutborrowing capital and cancontrol a larger number ofshareswithasmalleramount

ofinitialinvestment.

RiskLimitation—Hedging

Another big advantage ofoptions is that they allowinvestors to safeguard theirpositions against fluctuationsin price, especially when theinvestordoesn’twant toalterthe underlying position. Inthisway,optionscanbeusedto protect your portfolioagainstlargepricedrops.This

practiceisknownashedging.

Here is an example of howhedging with options can beused as a risk managementstrategy. Say you own 100sharesofstockXYZandyouare concerned that it may beheading fora fall.Youcouldbuyaputoptiononthatstockwhich would give you theoption to sell it at the givenstrikeprice,regardlessofhowfarthestockpricefallsinthe

market. For the price of thepremium, you have insuredyourself against any furtherlosses below the strike price.This is a conservativestrategy for limitingpotentiallossesinthemarket.

Disadvantages ofOptionsTrading

It is wise to weigh thepotential risks of optionsagainst the benefits that maybe gained before you decideto try your hand at optionstrading.

LevelsofRisk

There are two levels of risk

when trading optionsdepending uponwhether youaretheholderorwriteroftheoption.

As the holder of the option,your main risk is losing theentirepremium thatyoupaidfor the option. If the optionexpires worthless then youareoutyourentireprincipal.

As the writer of the option,you are exposed to asignificantly higher level of

risk. If you are writinguncoveredcalls, forexample,then your potential loss isunlimited as the underlyingsecuritycouldpotentiallyriseveryhigh.

IntrinsicValue

While purchasing a stockgives a certain amount ofintrinsicvalue,withoptionsitis quite different. An optionthatiscurrentlyat-the-money

or out-of-the-money (theseconceptsareexploredmoreinthe next chapter) has no realintrinsicvalue. Itsonlyvalueis its time value, which isconstantly declining thecloser itgets to itsexpirationdate.

TimeDecay

A risk that is unique tooptions is time decay. Thecloseranoptioncontractgets

toitsexpirationdatethemoreit loses value. Once theoption reaches its expirationdate it will have no valueunless it is exercised in-the-money. If the underlyingsecurity takes an unexpectedturn during the timeframe ofthecontract, the investorwillpotentially lose all of theinvestment capital. Unlikewith stocks, you cannotsimply wait it out. For thisreason, options are knownas

wastingassets.

Taxes

Another element to considerwhen investing in options isthe tax implications of yourtrades. Since options areshort-term investments theyare taxed at a different ratethanlongerterminvestments.However, losses on optionscan also be used to offsetgainsinotherinvestments,so

they can work to youradvantage in this regard aswell.Itisbesttoconsultwitha tax advisor to figure outyour best strategy for taxsavings.The bottom line is thatoptionstradingcanbeusedtoleverage your positions andmake significant profits.However, they come withtheir own set of risks and

require the investor to beconstantly on top of what isgoing on in the market. Dueto their unique timeconstraints, they are not forinvestorswho like to set andthenforgettheirinvestments.

TypesandStylesofOptions

There are a variety ofdifferent types and styles ofoptions available. Thissection provides an overviewofeach typeaswell as somebasic terminology everyoption investor should befamiliarwith.

CallOptions

A call option gives theinvestor the right (not theobligation) to buy theunderlying stock, bond,commodity, or otherinstrument,ataspecificpricewithin the time frame of thecontract. The specified priceis called the strike price. Aninvestorwhoisbullishonthestock,meaningheexpectsthe

stocktorise innearfutureorwithin the specific timeframe, would buy a calloption.

For example, say Investor AthinksstockXYZisgoing topost high earnings nextmonthand the stock isgoingto go higher. So she buys acall option on the stock for$20. The option contractspecifies that she canpurchase 100 shares of XYZ

at a strike price of $100withinthenext60days.Ifthepriceof thestockfallsbelow$100, then she will notexercise the option. Thecontractwillexpireworthlessandshewillhavelostthe$20purchase price. However, ifthe price of the stock risesabove$100,sayto$130,thenshe will exercise the option,buy the stock for $100, andthen sell it at the highermarket price. She has now

madeaniceprofit.

PutOptions

A put option is the oppositeof a call option. It gives theowner the right (but not theobligation) to sell theunderlying stock at aspecified price (the strikeprice) within the specifiedtimeperiod.Aninvestorwhois bearish on the stock,meaning he thinks the stockprice is headed downward,

wouldbuyaputoption.

For example, say Investor Bthinks stock XYZ isoverpricedandwilldeclineinprice over the next 60 days.He buys a put option on thestock for $20. The contractgives him the option to sellthe stock for$120within thenext 60 days. If the stockrises above $120 per sharethen he would not exercisethe option. It would expire

worthless and he has lost hisinitial investment. If insteadthe price of the stock dropsbelow$120, to say$90, thenhewouldexercisehisrighttosell the shares at $120 andpocket the difference asprofit.

Using Call and PutOptions to Make aProfit

There are a number of waysyou can use call and putoptions. For example,supposeyouthinkthatsharesofBankUS that are currentlysellingfor$200pershareareunderpriced and are going togo higher in the next coupleof months. You don’t have

enoughmoney tobuy100ormore shares of stock, yetwould still like to makemoney from the rise in thestock. In thiscase,youcouldbuyacalloptiononthestock,which would cost only afraction of the price of thestock. So you buy the calloptionandyounowhave therighttobuy100sharesofthestock at $200 anytime in thenext60days.

You might be thinking, howamIgoingtobuythestockinthenext60daysfor$200pershare if I don’t have themoney? The answer is thatyou don’t actually have tobuy the stock in order tomake a profit. If yourinstincts are correct and thestock price does rise above$200, then your call optionwill become more valuable.In other words, as the stockprice rises, the value of your

option contract also rises.You will be able to sell theoption contract itself, insteadof the stock, and make aprofit. The higher the pricerises, themore your contractwillbeworth.

Thisworks thesamewayfora put option, except in thiscaseyouwantthestockpriceto fall. As the price of theunderlyingsecuritydrops,thevalueofyourputoptionwill

rise. The further the pricefalls, the more valuable isyouroption.

As you can see, by buyingoptions,youareabletomakeaprofitregardlessofwhetherthestockisgoingupordowninprice.

StylesofOptions

The previous sections havegivenanoverviewofthetwobasic types of options, callsand puts. This section willhelp you understand thevarious styles of optionsavailable.

Most options that you willpurchasewill fall intooneoftwo categories, American orEuropean. These are

sometimes referred to asvanilla options. The maindifferencebetweenthetwoiswhen you can exercise theoption.

AmericanOptions

American options can beexercised at any time beforethe expiration date. Mostoptions on stocks and equityare of this type. These arealso the type of contracts

tradedonfuturesexchanges.

EuropeanOptions

Europeanoptionscanonlybeexercised on the expirationdate defined in the contract.These types of options aremainlytradedintheover-the-counter(OTC)market.Thevaluesof the twooptionstyles are calculated slightly

differently and theirexpiration dates are alsodifferent. American optionsexpire the third Saturday ofthe month, while Europeanoptions expire the Fridaybefore the third Saturday ofthemonth.

Similarities between the twoinclude the pay-off and thestrike price. The pay-off,either for calls or puts, iscalculated in the same way

for both types. Likewise, thestrikepricesnormallyare thesame.

ExoticOptions

While the above two stylesare the main ones mostinvestorswillbedealingwith,there are a variety of moreexotic option types to beawareofaswell.

BermudaOptions

Bermuda options are inbetween American andEuropeanoptions.Inthistypeof option you are allowed toexercise them on multipledates during the contractperiod.

BarrierOptionsBarrier options are differentfrom the other typesdiscussed so far in that inorderfortheoptiontopayoffthe price of the underlying

security must cross a certainlevel. They can be either putorcalloptions.Therearefourtypes of barrier options,whichareoutlinedbelow:

*Down-and-OutBarrier Options:A down-and-outoption gives theholder the right butnottheobligationtobuy(inthecaseofacall) or sell (in the

case of a put)shares of anunderlying asset ata pre-determinedstrike price so longas the price of thatasset did not gobelow a pre-determined barrierduring the optionlifetime. That is,once the price oftheunderlyingassetfalls below the

barrier, the optionis “knocked-out”and no longercarries any value.Hence the namedown-and-out.

*Down-and-InBarrier Options:A down-and-inoption is theoppositeofadown-and-out barrieroption. Down-and-

inoptions only carryvalueifthepriceoftheunderlyingassetfalls below thebarrier during theoptions lifetime. Ifthe barrier iscrossed the holderof the down-and-inoptionhas the rightto buy (if it is acall) or sell (if it isaput) sharesof the

underlying asset atthe predeterminedstrike price on theexpirationdate.

*Up-and-OutBarrier Options:An up-and-outbarrier option issimilar to a down-and-out barrieroption, the onlydifferencebeingtheplacement of the

barrier. Rather thanbeing knocked outbyfallingbelowthebarrier price, up-and-out options areknocked out if theprice of theunderlying assetrises above thepredeterminedbarrier.

*Up-and-InBarrier Options:

An up-and-inbarrier option issimilar to a down-and-in option,however thebarrieris placed above thecurrent price of theunderlying assetand the option willonlybevalid if theprice of theunderlying assetreaches the barrier

beforeexpiration.[1]

BasketOptionsA basket option, also knownas a rainbow option, is acontractinwhichthevalueisbased on two or moreunderlying assets. Thedecision to exercise theoption is dependent on theprices of all underlyingassets.

Capped-StyleOptions

In this type of contract amaximum profit isestablished. Capped optionscontain a provision in whichthe option is exercisedautomatically if theunderlying security reaches acertain established price.These types of options offerthe writer of the option amaximumamountthatcanbelost.

CompoundOptions

Thesearebasicallyoptionstopurchase an option. Alsocalled split-fee optionsbecause the holder must paytwo premiums, one upfrontand one if the option isexercised.

Look-BackOptions

Thisstyleofoptiongiverstheholder the right to eitherbuyorselltheunderlyingsecurity

at its peak (in the case ofcalls), or lowest (in the caseof puts), price over aspecifiedtimeperiod.

AsianOptionsAsianoptions,alsoknownasaverage options, are thosewherethepayoffissubjecttothe mean (average) price oftheunderlyingsecurityoveraspecificperiodtime.

BinaryOptions

Binaryoptionshaveapayoutthat is either a fixed amountor nothing at all. There aretwo types: cash-or-nothingand asset-or-nothing. In thefirst type, the holder wouldgeta fixedamountofcash ifthe option expires in-the-money. In the asset-or-nothing variety, the holderwouldreceivethevalueoftheunderlying security. Alsoknownasdigitaloptions, all-or-nothing options, and fixed

returnoptions.Theadvantageto this type of option is thatthe potential return is aknown certainty before theoption is purchased.However, once bought theycannot be sold before theexpiration.

ForwardStartOptionsForward start options startwithanundefinedstrikepricethatistobedeterminedinthefuture.

LEAPS

LEAPSstands forLong-termEquity AnticiPationSecurities. LEAPS areessentially the same asregularoptionsexceptforthelonger expiration dates. ALEAPcanhaveanexpirationdate that is up to three yearsaway. The advantage to thistypeofoptionisthereisalotmore time for the underlyingstock, and thus option, to

move in the direction youwantitto.

IndexOptions

In addition to purchasingoptions on individualsecurities, you can alsopurchase options on a stockindex.Thesecanbeappealingbecause they provideexposuretoanentiregroupofstocks. Index options areflexible and can fit into the

strategies of bothconservative and speculativeinvestors, during both a bulland a bear market. Mostindex options are Europeanstyleoptions.

OptionPricesandValuation

There are several factors thatgointodeterminingtheprice,or premium, paid for anoption. One of the mostimportant factors is thecurrent price of theunderlyingsecurity.

Basedon thecurrentpriceofthe underlying asset, an

option issaid tobeeither in-the-money,at-the-money,orout-of-the-money.

In-The-Money(ITM)

The phrase “in-the-money,”means that your optioncurrently hasworth based onthe price of the underlyingasset. In the case of a calloption,thisiswhenthestrikeprice is below the marketprice of the stock. Forexample,ifacalloptionhasastrike price of $30 and thestock price is currently $35,

then the option is consideredtobein-the-money

In contrast, a put option is“in-the-money” if its strikeprice is above the currentmarketpriceofthestock.Forexample,ifthestrikepriceofthe option is $35 and thestock is trading at $30, thenthe put option is in-the-money.

In either case, the larger thedifference between the strike

price and the current price,the more the option contractwillbeworth.

At-The-Money(ATM)

Forbothputandcalloptions,if both the strike price andstockpriceareequal,thentheoption is said to be “at-the-money.” For example, a calloption has a strike price of$50and theunderlying shareis trading at $50 in themarket. At this point, theoptionhas no intrinsic value.Itsvalueis in thetimevalue.

Thefurtherawaythecontractis from the expiration date,themoretimevalueithas.

Out-of-The-Money(OTM)

As you may have guessed,“out-of the-money” meansthe option contract has noworth based on the currentprice of theunderlying asset.The holder of the contractwouldnotexerciseanout-of-the-moneyoption.

A call option is out-of-the-money if the strike price is

higher than the currentmarket price of theunderlying stock. Forexample,ifthestrikepriceofthecallis$35andthestockistradingat$30 thecalloptionis out-of-the-money. In thiscase, the owner of thecontract would not exercisehis right to buy the stock atthe strike price because it’scheaperinanopenmarket.

In contrast, a put option is

out-of-the-money if themarket price of the stock isabove the strike price of theunderlying security. Forexample,iftheputoptionhasa strike price of $30 and thestock is currently trading at$35 in the market, then theoptionisout-of-the-money.Itwould not be profitable forthecontractowner tosell thestock at strike price lowerthan the market price of thestock.

An out-of-the-money optionhasnointrinsicvaluebutmayhavetimevalue.However,itstimevaluewillquicklydecayastheoptiongetsclosertoitsexpirationdate.

Intrinsic Value versusTimeValue

The option premium iscomposed of two majorcomponents—intrinsic valueand time value. Intrinsicvalue is the differencebetween the market price ofthe stock and the strikepriceof the stock. It will bepositive provided you are in-the-moneyandzeroifyouare

eitherat-the-moneyorout-of-the-money. For an in-the-money option, the intrinsicvalue will increase as thedifference between the strikeprice and the stock priceincreases.

Intrinsic value is easy tocalculate. For instance, if astock was priced at $50 andyou purchased a call optionwith a strike price of $45,then that call option would

have$5of intrinsicvalue. If,however, the stockpricewassellingat$45orless,thenthecall option would not haveanyintrinsicvalue.

The other importantcomponent of the optionspremium is its time value.Thetimevalueofanoptionisdirectly related to theexpiration date. This is thedate on which the contractwillexpire.Ifthisdatepasses

and you, the holder of thecontract, do not sell orexerciseyouroption then thecontract expires without anyvalue. This is probably themain reason why optionstrading can be a high-riskventure.

To understand it more fullythink of it as time decay.Simply put, the longer anoption has before it expiresthemoretimevalueithas.In

otherwords,as timemarcheson, the value of the optionsyouownwillbe losingsomeof their value—especially ifthe underlying security goesdown in price or stays nearthe original price that youinitially bought the options.Time decay is a criticalelement that must bemonitored when you areinvestinginoptions.

Time value is a little more

complicated to estimate thanintrinsicvalue.Becauseofthefixedexpirationdate, there isonlyacertainamountoftimefor theunderlyingsecurity tomove in the direction youwant it to. In general, thelonger the expiration date isaway from the current date,themore time value there is.As theexpirationdatecreepscloser, the time value, andthus the premium, willdecrease. This makes sense

becauseifasecurityhasmoretime to move in the pricedirection youwant it to thenthereismoreofchancethatitcouldhappen.

OptionPricingModels

Thereareseveralmodelsthatinvestorsusetodeterminethecurrentvalueofanoption.

Black-ScholesModel

The Black-Scholes Model isprobablythemostusedmodelfor pricing options. It wasdeveloped in 1973 by theeconomists Fischer Black,

Myron Scholes, and RobertMerton.Thismodelisusedtocalculate the price ofEuropean options. Theformula for the model iscomplicatedandmost traderswill not want to do thecalculations themselves butwillinsteadrelyononeoftheonline options tradingcalculators.

Cox-Rubenstein BinomialOptionPricingModel

This model is a variation ofthe Black-Scholes formula.Thismodeluses thevalueoftheunderlyingsecurityoveraperiodtime,insteadofjustatthe expiration date. For thisreason, this model is oftenused for valuing Americanoptions which can beexercised at any time duringthe contract period. Again,calculating this formula byhand is probably not whatmostinvestorsaregoingtodo

and a variety of onlinecalculators can be used forthispurpose.

Put/CallParity

Put/call parity refers to therelationship between put andcall options with the samestrike price and expirationdate. It is used only forEuropean-style options. Itstatesthat“thevalueofacalloption, at one strike price,

implies a fair value for thecorresponding put and viceversa.”[2] Basically, theprinciple states that theoptions and underlying stockpositionsmusthavethesamereturn. Otherwise, arbitrage,or the ability to profit fromprice variances, would ariseand an investor couldpotentially profit risk free.Put/call parity is used as asimple test to see if options

arepricedfairly.Mostonlinetradingplatformsoffera toolforanalyzingput/callparity.

GettingtoKnowtheGreeks

If you trade in options, thenyouaregoingtobehearingalot about what arecollectively known as theGreeks.Thesevaluesareusedto evaluate various optionpositions and measure theriskinvolved.

Delta

Delta measures the option’spricesensitivityinrelationtothe underlying asset. It isgivenasthenumberofpointsthe option is expected tomove for each point changeintheunderlyingsecurity.

This is the most used of theGreeks and it is important toknow because it tells theinvestorhowtheoptionvalue

will change based on pricefluctuationsofthestock.

Delta is usually expressed asa value between 0.0 and 1.0for call options and between0.0 and -1.0 for put options.They are sometimesexpressed as whole numbersrather than decimals. ThecloserthatDeltagetsto1(orconversely -1) the morevaluableistheoption.

Gamma

Gamma is ameasure of howmuch the option’s Deltachangeswhenthepriceoftheunderlyingassetchanges.Itisusedwhentryingtoassessthepricefluctuationofanoptioninrelationtohowfarinoroutof the money it is. Gammavalues increase as an optiongets closer to being at-the-money. As an option moves

furthereitherin-to-the-moneyor out-of-the-money, theGammavaluewilldecrease.

Rho

Rhoisanestimateofhowtheprice of an option, itspremium, will change withrespect to interest ratechanges.Typically,ifthereisan increase in interest rates,then the premium on calloptions will rise and putoption premiums willdecrease.

Vega

Vega is a measure of thesensitivityofanoptiontothevolatility of the underlyingasset.Themore time there isto the expiration date, themore the option will beimpacted by increased pricevolatility. Increased volatilitywill increase the value of anoption.

Theta

Thetaisameasurementofthesensitivity of the option totime decay. It measures theamount of value that theoptionwill lose for each dayitgetsclosertoitsexpiration.Most trading platformsprovide up-to-date values forthe Greeks for every optioncontract.

GettingStartedwithTradingOptions

Now that you’ve learned thebasicsofoptions, it’s time toget ready to make sometrades.

OptionsExchanges

Trades are made on one ofseveral regulated exchanges.Most options are listed onmultiple exchanges. Sinceoption contracts arestandardized, thismeans theycan be traded betweenexchanges.Thefollowingarethe current eleven optionsexchanges:

·BATSOptions

Exchange· BOXOptionsExchange· C2OptionsExchange·ChicagoBoardOptions Exchange(CBOE)· InternationalSecuritiesExchange(ISE)·MIAXOptionsExchange· NASDAQ

OMXBX· NASDAQOMXPHLX· NASDAQOptionsMarket· NYSEAmexOptions· NYSEArcaOptions

Options ClearingCorporation(OCC)

The OCC was founded in1973 and acts as theclearinghouse for optionscontracts. It is the issuer andguarantor for options andfutures contracts. Because ofthe OCC, investors can beconfidentthattheirtradeswillbe settled, premiums will becollected and paid, and all

assignments will be madeaccording to regulations. It isunder the jurisdiction of theSecurities and ExchangeCommission(SEC).

Opening a TradingAccount

Beforeyoucanbegin tradingoptions, you are going toneed to open a brokerageaccount. There are manybrokerage firms availableincluding both full serviceand discount brokers. Whattype you choose dependsupon the level of advisingyou require. Discount firms

offer lower fees but do notofferpersonalizedadvice.Allof the top firms provide avariety of online tools andcalculators to help you withyourinvestingdecisions.

Some of the top-ratedbrokeragefirmsinclude:

· Charles Schwab -www.schwab.com·FidelityInvestments-www.fidelity.com· TDAmeritrade -www.tdameritrade.com

·InteractiveBrokers–www.interactivebrokers.com· tradeMonster –www.trademonster.com· Place Trade –www.placetrade.com· TradeStation –www.tradestation.com· OptionsXpress –www.optionsxpress.com· OptionsHouse –www.optionshouse.com· E*Trade –www.etrade.com· Merrill Edge –www.merrilledge.com

Once you have selected your

brokeragefirmyouwillselectyour account type: either acash account or a marginaccount.Inamarginaccountyou would use collateral toborrow funds to financetransactions. In a cashaccountyouwouldtradewiththe available cash in youraccount. If you select amargin account you will berequired tomakeaminimumdeposit of at least $2,000 toopen the account. A cash

account typically requireseither no deposit or a smalldeposittoopentheaccount.

The amount of cash andassetsyouneedtomaintainina margin account varies bybrokerage house. If theamount drops below therequired amount, then thefirmwillissueamargincall.Thismeans youwill need toadd more capital to theaccount to meet their

minimum requirements. Ifthis is not done, then thebrokerage firm will liquidateyourassets.Forthisreason,itis important to be aware ofyourmarginrequirements.

OptionsAgreementOnce you’ve opened youraccount, the next step is tocomplete an optionsagreement prior to startingoptions trading. Thisagreementoutlinesyourbasic

understanding of tradingoptions, your financialcapabilities to deals withlosses, and your risk level.After you complete theagreement, the brokeragefirm will assign you to anoption approval level. Whilethere is no official standardfor what level you will beassigned,thesearethetypicallevels:

· Level 1:

Covered calls, longprotectiveputs· Level2:Callsandputs· Level 3:Spreads,straddles· Level 4:Uncovered ornakedcallsandputs

Investors without a lot ofexperience will typically beassignedtolevel1orlevel2.This is done to protect you

from losing money due tolimited understanding of therisks involved and also toprotect the brokerage houseagainst losses fromunderfunded investors whodefault on their marginaccounts. Inmost cases, it ispossibletohaveyourleveloftrading moved up bycontacting the brokeragefirm.

PlacingYourOrder

Most beginners think thatwhen they first start tradingoptions it’s just a matter ofpickingwhichoptions tobuyand when to sell them.However,it’snotthatsimple.Therearefourdifferenttypesof orders that can be placedwhen buying and sellingoptions.These four types arebuytoopen,buytoclose,sell

to open, and sell to close.After choosing one of theseorder types, you must alsochoose how to fill it eitherthrough a limit order or amarketorder.Youmustalsolet your broker know thetimingofyourorder.

OrderTypes

Here is a breakdown of thedifferentordertypes.

Buy to Open. The buy toopenorderisthesimplestandmost placed option order.Thisisusedtobuyanoptioncontract to establish a newposition.

BuytoClose.Thisisusedtoclose out an existing shortposition and close thecontract. You would place abuy tocloseorder ifyouhadshort sold a specific optionscontractandwantedtogetout

of (close) that position. Forinstance if the optionscontracts you sold havesubsequently gone down invalue you can by thesecontracts back at the lowerpricebyusingabuy tocloseorder thus locking in yourprofits.On the other hand, ifyour options that you soldshort have gone up in valueand youwant to stop furtherlossesyoucanplaceabuytoclose order and buy the

contracts back, thuspreventing any furtherpotential losses. Remember,if you have taken a shortposition,thenyouaremakingaprofitwhenthepriceoftheoption has gone down, andyou are in a loss positionwhen the price of the optionhasgoneup.

Sell to Open. This order isusedtoopenapositiononanoptions contract with the

intent to short sell it. Youwould use this type of orderwhen you are selling acoveredcall.

Sell to Close. The sell toclose order is used to exit apositionbyselling theoptioncontract. It is really just theorder you use to sell optionscontracts that you alreadyown. The order can be usedforputsorcalls.

TypesofFillOrders

Afteryouhavedecidedwhichtype of order you want, youneedtochoosehowtofilltheorder. The choices aremarketorders,limitorders,stop orders, and stop-limitorders.

Witha limitorderyour tradewillbeexecutedatapricenohigher(ifyouarebuying),orno lower (if you are selling)

than the price level youdesignate. This protects youfrom buying contracts at aprice higher than youexpectedor selling at apricelowerthanexpected.

Amarket order will fill theorder at the current marketprice.Thisinvolvessomeriskbecause options cansometimes move quickly inprice, which means that youcould end up buying the

contracts at a higher pricethan you were expecting orsellingthecontractsatapricelower than you wereexpecting.

A stop order will be filledwhen the price reaches thestopprice.Astop-limitordercombines the features of astoporderwiththefeaturesofalimitorder.

TimingOrders

Whenplacingyourorder,youwill also need to specify theorder duration or timing.Types of timing orders are:dayorder, all or none, fill orkill, good until cancelled,gooduntildate,orimmediateorcancel.

Thedayorderisanorderthatmust be filled during thetradingday that it is initiatedonoritwillbecancelled.

Theallornoneordermustbe

completelyfilledornoneofitis filled. For instance, if youare trying to buy 30 optionscontractsatacertainpricebutthebrokercanonlybuy25atthat price, then the order isnotprocessed. It is importantto remember that this orderremains open and does notexpire at the end of thetrading day unlike the dayorderalthoughyoucancancelitwheneveryouwishto.

Thefillorkillorderislikeanall or none order with theadditional requirement that itiscancelledautomaticallyifitisnotfilledimmediately.

Thegood tilcancelledorder,orGTC,isanorderthatdoesnotcanceluntilyoucancelit.Thus, this order will remainopen until you decide tocancelitoritisfilled.

The good til date order, orGTD, will remain open until

a specified date and thencancelled if it has not beenfilled.

The immediate or cancelorder is like the fill or killorder with one difference.With this type of order ifsome of it is filledimmediately and the rest isnot, the remaining contractsthat are not filled arecancelled.

UnderstandingOptionsChains

Options chains providevaluable information theinvestorneedstomaketrades.Most financial websites andbrokers provide real-timeoptionschains.Here’sabriefoverview of how to read anoptionschain.

At the top of the chart is thenameoftheunderlyingstock,

its ticker symbol, theexchange it’s listed on, itscurrent market price, andvolume.

The columns in the optionchainare:strike,symbol,last,change,bid,ask,volume,andopeninterest.

The first column lists thestrike price for the givenoption.

The second column contains

theoptionsymbol. The chaindisplays information for boththecall(C)andtheput(P)foreachstrikeprice.

The bid is the current pricethatbuyersarewillingtopayfor theoption.Theask is thecurrent price that sellers arewillingsellfor.

Thevolume is thenumberofoptions contracts that havetradedthatday.

The open interest columnshows the number ofoutstandingopencontracts.

MakingTrades

The actual process forexecuting an order is prettystraightforward and followsthe same process, whetheryouchoosetotradeonlineoroverthephone.

1.Placingthetrade

To place a trade, you willneedthefollowing:

· The option

symbol· The type ofoption:putorcall·Thetypeoffillorder: buy to open,buytoclose,sell toopen,selltoclose·Thestrikeprice·Theexpirationdate·Thepriceyourare willing pay:market or limitorder

· Thetimingofthe order: dayorder, good untilfilled,etc.

2.Orderconfirmation

Before placing your order,makesureyoucheckoverallthe information tomake sureitiscorrect.Onceyousubmitthe order, you will receive aconfirmation that the orderhas been placed. The orderhas not yet been executed. It

ispendingtobefilled.

3.Tradeexecution

Depending upon your tradedetails, it could be just acouple of minutes orpotentiallyhoursorevendaysuntil your trade is executed.Once the order has beenfilled, you should receive anotification telling you theexecutionprice.

4.Wait

Nowyoujustneedtomonitoryour positions and follow-throughwithyourplan.

TradingTools

Most brokers offer a varietyof tools and calculators tohelp you with your optionstrading.

Research and analysis.Before you trade you willwanttodosomeresearchanddata analysis on theunderlying stocks such asprice history, volatility,earnings reports, and other

data.

Paper trading. Before youpart with any hard-earnedcash, it’s a good idea to tryyour hand in a simulatedtrading environment. Mostonline brokerage firms havetools that let you simulatetrades and gain experiencebefore you start riskingmoney.

Options calculator. Thesetools will calculate potential

profits and losses as well asprovidevaluesfortheGreeks.

Options screener. Use thesetools to narrow down yourchoices by screening optionsbased on particular criteriasuch as volatility, marketforecasts,orotherconditions.

Options chains. This toolshowstheentireseriesofputand call options offered on aparticular stock along withtheir premiums, volume, and

othercharacteristics.

OptionTradingStrategies

Before you begin tradingoptions, you need to have astrategy. You should knowyour investment goals andpick a strategy thatwill helpyou reach your goals. Aninvestor who is looking toprotect himself againstpotential losses on stocks healready owns will choose a

different strategy from onewho is trying to profit fromthe increased leverage thatoptionscanprovide.

SimpleStrategies

Ifyouareabeginnerwhenitcomes tooption trading, thenstartingoffwithafewsimplestrategiesisprobablythebestway to start. As you gainmore experience and becomemore comfortable withtradingoptionsyoucanmoveon to more complicatedstrategies.

CallBuying

Buying call options is apopularstrategyforall levelsof investors. In this strategy,you purchase call options ona stock that you believe isheaded higher. If the stockpriceishigherthanthestrikeprice plus the premium paidby the expiration date thenyouwillmakeaprofit.Ifyouare wrong, then youpotentially lose your entire

premium.

The majority of call optioncontracts are sold beforeexpiration,whenthepremiumgoesup.However,youcouldalso purchase the underlyingsecurity at any time beforethe expiration date if that isyourobjective.

To make a profit with thisstrategy, you need to havegood timingandyouneed toknow when you should exit

the contract. If you wait toolong and the stock does notrise high enough or fastenough, then the optionmaynot be worth exercising orselling.

Someinvestorschoosetobuycalloptionsinsteadofbuyingstock on margin. They offerthe same use of leverage butcarry less risk. If you haveboughtastockonmarginandthestockfalls,youmaygeta

margin call and be forced toaddcashorliquidateassetstomeet it. The only risk youfacewithbuyingcalloptionsislosingthepremium.

PutBuying

Putbuying ismuch the sameas call buying except in thiscase you believe the stock isheaded downward. Aninvestor would use thisstrategy as insurance against

losses on assets alreadyownedortomakeaprofitinabear market. If you believethe market, or a particularstock, is headed down, thenthiswouldbeagoodstrategytoconsider.

Thisstrategyisoftenusedbystock owners to lock in aselling price and protectthemselves against stockdeclines.

It can also be used for

speculationonstocksthatyoudon’town.Asthepriceofthestock declines, the premiumon the option should riseallowing you to make aprofit. This can be appealingin a down market and is analternative to selling stocksshort.

CoveredCall

Another simple strategy is towrite a covered call. In this

straightforward strategy, youwould sell (write) a calloption for stocks that youalready own, or purchaseshares at the same time asyouwritethecall,knownasabuy-write. You receive cashin the form of the premiumupfrontandyourhopeisthatthe call option is neverexercised.An investorwouldchoose this strategy togenerate additionalprofitsonastock thatshedoesnot feel

is headed higher, at least inthe short term. In this way,the covered call acts as adividendonthestock.

Theriskwithacoveredcallisthat it will be exercised andyoumust be prepared to sellyour stock to cover it.However, if the stock headshigher, you can protectyourself by buying a call inthesameseriesastheoneyousold and closing out your

position. The premium paidfordoingthisshouldmoreorless equal the amount youreceivedwhen you sold youroriginalcalloption.

MarriedPut

Astrategyinwhichyoubuyaput option on a stock whichyou already own (or buy atthe same time as the put) isknown as a married put. Aninvestor would use this

strategy to protect againstlossesifthestockpricedropsdramatically. It functionsbasically as an insurancepolicy.

Spreads

A spread is a strategy thatinvolves two transactions,normally executed at thesametime.Spreadsarealittlemore advanced than thesimple strategies covered sofar, but they are useful toolsand well worth learningabout. The most commontype of spreads are verticalspreads, inwhichoneoption

hasahigher strikeprice thanthe other. In a spread, eachtransaction is referred toasaleg. The advantage of aspread is that your risk andpotential losses areminimized. The disadvantageis that your profits are alsolimited.

BullCallSpread

Thistypeofverticalspreadisusedbybullishinvestors.The

investor would buy calloptionsonastockatacertainstrike price whilesimultaneously selling a callonthesamestockatahigherstrike price. Both optionswould have the sameexpirationdate.

BearPutSpread

Thisisalsoaverticalspread.In this strategy, you wouldbuy put options at a certain

strike price and then sell thesame number of puts at alowerstrikeprice,bothonthesame underlying stock withthesameexpirationdate.Thisis a strategy for bearishinvestorswho think thepriceof the stock is going todecline. Used as analternative to short selling astock.

Calendar/TimeSpread

A calendar, or time, spreadinvolvespurchasinganoptionwith one expiration date andthen selling another with adifferent expirationdate.Thestrikepriceforeachwouldbethesame.Inthisstrategyyouare hoping to take advantageoftimedecay.

ButterflySpread

Butterfly spreads aresomewhat complicated and

best used by moreexperienced investors. In thisstrategy, an investorcombines both a bull and abear spread strategy, usingthreedifferentstrikeprices.

Straddle(Long)

A straddle is used by aninvestorwhobelievesastockisgoingtomovesignificantlyin one direction or anotherbutisn’tsurewhichdirectionthat it is going to be. In thisstrategy,youwouldpurchase(orsell)bothacalloptionanda put option on a stockwiththe same strike price and thesame expiration date. These

offer unlimited profitpotential while at the sametimelimitingrisk.

IronCondor

Theironcondorisacomplexstrategy that involvessimultaneouslyholdingalongand short position in twodifferent strangle strategies.In this strategy, the investorsellsanout-of-the-moneyputoption, buys another out-of-the money put option with alower strike price, sells anout-of-the-money call option,

and buys another out-of-the-moneycalloptionatahigherstrike price. This strategyoffer limited risk and a goodprobabilityofearningasmallprofit.

IronButterfly

This is another complexstrategy used as a limitedrisk, limited profitcombination. In the ironbutterflystrategy the investorbuys an out-of-the-moneyput, sells an at-the-money put, sells an at-the-moneycall,andbuysanotherhigher strike out-of-the-moneycall.

NakedCalls

A naked call is a riskyinvestment strategy in whichaninvestorwritescalloptionson an underlying securitywithout ownership of thatsecurity.Itisriskybecauseifthe buyer of the call optionexercises theoption, then theseller must buy the stock atthe current market price inorder to fulfill the buyer

order.Theriskin thiscaseisunlimitedbecause there isnoway to control how high themarketpriceofthestockwillgo.

Collars(Protective)

In this strategy, the investorpurchases an out-of-themoneyputoptionwhileatthesame timewriting an out-of-the-money call option on thesame stock with the sameexpiration date. This is usedbyinvestorstolockinaprofitwithoutsellingthestock.

Strangle(Long)

In the strangle strategy, theinvestor buys both a putoptionandacalloption,bothusually out-of-the-money, onthesamestockwiththesameexpiration date, but withdifferentstrikeprices.Thisisused when the investor isunsurewhichwaythestockisheaded.

Strategies by MarketOutlook

Belowisalistofstrategiestouse based on your currentoutlook, either toward themarketasawholeortowardaparticularsecurity.

NeutralStrategies

· ButterflySpreads

· CalendarSpread·Collar·IronCondor·MarriedPut·Straddle·Strangle

StrategiesforBulls

· Bull CallSpread· Bull PutSpread

·Collar·CoveredCall·LongCall·MarriedPut·ShortPut

StrategiesforBears

· Bear CallSpread· Bear PutSpread·LongPut·NakedCall

·ShortCall

ExitStrategies

It is vital to plan your exitstrategy before you begintrading to avoid takingunnecessary losses. You canexit,orclose,yourpositionatanytimebeforetheexpirationdate.The timingofyour exitis very important and canmake the difference betweenmaking money and losingmoney. Before you begin,

you should decide how youwillexitifyouroptionisout-of-the-money, at-the-money,orin-the-money.

ClosingOut

Onewayexittoisbyclosingoutyouroption.This isdoneby either buying an optionyousold,orsellinganoptionyou bought. Basicallyreversingyourposition.Ifthepremium has gone up since

you bought the option, thenyouhavemadeaprofit.Ifthepremium has decreased, youmay want to cut your lossesandsell.

As an optionswriter you arealmost never forced to fulfillthe obligation to buy theunderlying security becauseyou can close out yourpositionbeforeitisexercised.

Again, timing is everythingwhen it comes to option

trading and youmust keep acloseeyeonyourinvestmentswithregardtowhenitistimeto sell, either to take yourprofits, or to cut your lossesandmoveon.Thecloseryougettotheexpirationdate,themore volatile the optionsbecome, and so you need tomonitor them even moreclosely.

RollingOut

Ifyoudon’twanttocloseoutyour options, then you canroll them. This involvesclosing out your existingposition and then opening anew position that is identicalto the one you sold exceptwithanewexpirationdate, anew strike price, or possiblyboth.

ExercisingOptions

If you are the options holder

then you can choose toexerciseyouroptionandbuythe underlying security. Thistypicallyonlymakes sense ifthe option is in-the-money,since in either of the othertwo cases itwould notmakesense.

If you are the writer of theoption then you have nocontrol over whether thebuyeroftheoptionchoosestoexerciseitornot.

Once you’ve considered thepossiblescenariosandchosenyour exit strategies for eachcase, it’s important that youclosely monitor yourpositions and follow throughonyourplan.Optionstradingis fast-paced and it can beeasy to get caught up in themoment and lose track ofyour long-term goals. Don’tlet your emotions rule. Stick

to your plan and you aremuchmorelikelytoseeyourprofits grow over the longterm.

SourcesofInformationResearch is key to being asuccessful investor.Youwillwant find out as muchinformationasyoucanaboutthe underlying securities, theoverall market, and theparticular option series youare considering. There are avariety of good sources ofreliableinformationavailable,muchofitfreeofcost.

OnlineResources

The Internet is probably thefirst source most investorsturntotodayforinformation.There are many greatfinancial websites to choosefrom that offer plentiful up-to-date information andresearch. Here are a few ofthe best sites to get youstarted.

·BigCharts.com

·

Bloomberg.com· FinancialTimes·

MarketWatch.com·

Morningstar.com· MSNMoney/CNBC· TheMotleyFool·TheStreet.com· Wall Street

Journal·Yahoo!Finance·

YCHARTS.com

Apps

Puttingtechnologytousecanhelp you stay on top of yourinvestments. There areseveralgood investmentappsthat are worth checking out.In addition, most brokeragefirmsalsoputoutanapp.

·Bloomberg·CNNMoney·MotifInvesting· Personal

Capital·SigFig· Stockof theDay·StockTwits· Yahoo!Finance

Newspapers,Magazines, andNewsletters

Newspapers, newsletters, andmagazines are also popularsources of information.Mostnewsletters are paid servicesthat offer information, picks,research, andrecommendations.

Newspapers

·Barron’s· FinancialTimes· The WallStreetJournal·ValueLine· WashingtonPost

Newsletters

· DowTheory

Forecasts·ETFTrader· GlobalResourcesTrading· HulbertInteractive· MarketWatchOptionsTrader· TheProactiveFundInvestor· ThePrudentSpeculator· TheTechnicalIndicator

Magazines

· BloombergBusinessweek· ConsumerMoneyAdviser·FastCompany·Forbes·Fortune·Kiplinger’s

TipsandTricksforAvoidingCostly

MistakesSaveyourselfsomeheartacheby avoiding these costlymistakes.

1. Don’t invest more thanyou can afford to lose.Remember,optionstradingisa risky proposition and ifyour hunches are wrong or

yourtimingisoffitisentirelypossible to lose your entireinvestment. Start off small,no more than 10-15 percentof your portfolio should beusedforoptionstrading.

2.Do the proper research.Don’t hurry into aninvestment because someonetold you it was a good idea.Do your own research andmake an informed decisionbeforeyoumakeatrade.

3. Adjust your strategybasedonmarketconditions.No one strategy is going towork in all markets. Keepabreast about what is goingon in the economy and thefinancial world and adaptyour trading strategies tomatch current marketconditions.

4.Know your exit strategybeforeyoupurchase.Haveaplanandstick to it.Don’t let

your emotions overrule yourrational decisions. Chooseyour upside and downsideexit points as well as yourtimeframe and don’t let theeuphoria of making largerprofitssidetrackyou.

5.Don’t take onmore riskthan you are comfortablewith.Everyinvestorhastheirown level of risk tolerance.Knowyourriskcomfortleveland choose strategies that

staywithinthatterritory.Youdon’t want to lose sleep atnight wondering if you’vemade the right investmentdecisions.

ConclusionYoushouldnowhaveabasicunderstanding to options andtheworldofoptionstrading.

Now you are ready to applywhat you have learned andgetstartedininvesting.

Remember, do your researchand don’t take on more riskthan you are comfortablewith.

Bestofluck!

GlossaryAmericanoptions:Atypeofoption that can be exercisedat any point up until theexpirationdate.

Ask:Thecurrentprice thataselleriswillingtoaccept.

At-themoney(ATM):Whenthestockpriceisequaltothestrikepriceoftheoption.

Bid: The current price that abuyeriswillingtopay.

Break-evenpoint:Thepricethestockmust reach inorderfor the option to result inneitheraprofitoraloss.

Call:Anoptioncontract thatgivestheowneroftheoptionthe right to buy theunderlying security at thepredeterminedprice.

Close: To buy or sell an

option in order to offset apreviousposition.

Collar: A simultaneouspurchase of a protective putandwritingofacoveredcall.

Day order: An order thatmustbefilledon that tradingdayoritiscancelled.

Europeanoptions:Atypeofoption that can only beexercisedatexpiration.

Exercise: To invoke the

rights granted to the optionholder, specifically, theability to buy or sell theunderlyingstock.

Expiration date: The dateupon which both the option,and the right to exercise theoption,expires.

Good ‘til canceled (GTC):An order that remains openand valid until it’s eitherfilledoryoucancelit.

Historical volatility: Thefluctuation trends during atimespanofoneyear.

Implied volatility: This isdetermined by looking at thehistoricalvolatilityinordertoestimate possible futurevolatility.

In-the-money (ITM):A calloption is in-the-money if thestrike price is less than themarket price of theunderlying security. A put

option is in-the-money if thestrikepriceisgreaterthanthemarket price of theunderlyingsecurity.

Intrinsicvalue:Thevalueoftheoptionifexercised.

Leverage: To use a smallamountofmoneytocontrolamuchlargerinvestment.

Limit order: An order thatcan only be filled at a givenpriceorbetter.

Long:A position where youownasecurityoroption.

Long-term EquityAnticiPation Securities(LEAPS): Options whoseexpiration dates are between1and3yearsinthefuture.

Market order: An order inwhich thebuyer iswilling topaythecurrentmarketprice.

Naked call: A call optionwrittenonasecuritythatyou

donotown.

Out-of-the-money (OTM):A call option is out-of-the-money if the strike price isgreater than themarket priceof the underlying security.Aput option is out-of-the-money if the strike price isless than themarket price oftheunderlyingsecurity.

Premium:Theprice that theinvestorpaysfortheoption.

Put: An option contract thatgives the owner the right ofselling the underlyingsecurity at the predeterminedprice.

Quadruple witching day:The third Friday of the lastmonth in each quarter(March, June, September,December). This is the daythat stock options, stockindex options, stock indexfutures, and single stock

futures all expire.Historically,theseareheavilytradeddays.

Short: A position in whichthe investor sells, or writes,theoption.

Spread: A strategy inwhichthe investor holds two ormore simultaneous positions.May also refer to thedifference between the bidandtheaskprice.

Stop-lossorder:Anorder tosellanoptionwhenitreachesaspecificpricelevel.

Strikeprice:Thestrikeprice,also known as the exerciseprice, is the predeterminedprice at which the owner ofan option can buy (call) orsell(put)theunderlyingstockorothercommodity.

Time value: The value leftafter the intrinsic value isdeducted from the option

price.Losesvalue,ordecays,the closer it gets to theexpirationdate.

Volatility:The fluctuation intheoptionprice.

Write: To sell an option toopenanewposition.

FromtheAuthor

Thank you for readingOptions Trading Strategies:Complete Guide to GettingStarted and Making Moneywith Stock Options. Isincerelyhopethatyoufoundthis book informative andhelpful.

It would be greatlyappreciated ifyoucould takeafewmoments toshareyour

opinionandpostareviewforthis book. Your positivereviewhelpsustoreachotherreadersandprovidesvaluablefeedback with which we canimprovefuturebooks.

Thankyou!

[1]

http://www.wikinvest.com/wiki/Exotic_Options_-_Barrier_Options[2]

http://www.investopedia.com/university/options-pricing/put-call-parity.asp

TableofContents

CopyrightDisclaimerIntroductionOptions101WhatAreOptions?BuyingandSellingOptionsAdvantages of OptionsTrading

Disadvantages of Options

TradingTypesandStylesofOptionsCallOptionsPutOptionsUsingCallandPutOptionstoMakeaProfit

StylesofOptionsOptionPricesandValuationIn-The-Money(ITM)At-The-Money(ATM)Out-of-The-Money(OTM)Intrinsic Value versus TimeValue

OptionPricingModels

GettingtoKnowtheGreeksDeltaGammaRhoVegaThetaGetting Started with TradingOptions

OptionsExchangesOptionsClearingCorporation(OCC)

OpeningaTradingAccountPlacingYourOrderUnderstanding Options

ChainsMakingTradesTradingToolsOptionTradingStrategiesSimpleStrategiesSpreadsStraddle(Long)IronCondorIronButterflyNakedCallsCollars(Protective)Strangle(Long)StrategiesbyMarketOutlookExitStrategies

SourcesofInformationOnlineResourcesAppsNewspapers, Magazines, andNewsletters

TipsandTricksforAvoidingCostlyMistakes

Glossary