OptionsTradingStrategiesCompleteGuidetoGettingStartedandMakingMoney

withStockOptions

ScottJ.Danes

DylannaPublishing

Copyright©2014byScottJ.DanesAllrightsreserved.Thisbookoranyportionthereof

maynotbereproducedorusedinanymannerwhatsoeverwithouttheexpresswrittenpermissionofthepublisherexceptfortheuseofbriefquotationsina

bookreview.

DylannaPublishing

Firstedition:2014

Disclaimer

Thisbookisforinformationalpurposesonly.Theviewsexpressedarethoseoftheauthoralone,andshouldnotbetakenasexpert,legal,ormedicaladvice.The

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Everyattempthasbeenmadetoverifytheaccuracyoftheinformationinthispublication.However,neithertheauthornorthepublisherassumesany

responsibilityforerrors,omissions,orcontraryinterpretationofthematerialcontainedherein.

Neithertheauthororthepublisherassumesanyresponsibilityorliabilitywhatsoeveronthebehalfofthereaderorpurchaserofthismaterial.

Contents

IntroductionOptions101

WhatAreOptions?

BuyingandSellingOptions

AdvantagesofOptionsTradingLeverageRiskLimitation—Hedging

DisadvantagesofOptionsTradingLevelsofRiskIntrinsicValueTimeDecayTaxes

TypesandStylesofOptionsCallOptions

PutOptions

UsingCallandPutOptionstoMakeaProfit

StylesofOptionsAmericanOptionsEuropeanOptionsExoticOptionsLEAPSIndexOptions

OptionPricesandValuationIn-The-Money(ITM)

At-The-Money(ATM)

Out-of-The-Money(OTM)

IntrinsicValueversusTimeValue

OptionPricingModelsBlack-ScholesModelCox-RubensteinBinomialOptionPricingModelPut/CallParity

GettingtoKnowtheGreeksDelta

Gamma

Rho

Vega

Theta

GettingStartedwithTradingOptionsOptionsExchanges

OptionsClearingCorporation(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,andNewslettersNewspapersNewslettersMagazines

TipsandTricksforAvoidingCostlyMistakesGlossary

Introduction

Novice,andevenexperienced,investorsareoftenwaryofinvestinginoptions.Many people view options as risky, exotic, and only for investors with largebankrolls.However,nothingcouldbefurtherfromthetruth.Optionsareagreatwayforallinvestors,regardlessofexperienceorrisktolerance,toexpandtheirportfoliosandmakemoneyinthestockmarket—whetherthemarketisgoingupordown.

Optionsaretheperfectvehicleforincreasingyourleverage,allowingyoutoturnasmallinvestmentintoexponentiallylargerewards.Theycanalsobeusedasaninsurancepolicy,protectingyour investments incaseofamarketdownturn. Inshort,optionsareatoolthateveryinvestorshouldunderstandandpotentiallyputtouse.

In thisbook,you’ll learnall the insandoutsofstockoptions, frombasicputsandcallstomoreexoticstraddlesandspreads.Bytheendofthisguide,you’llhaveacompleteunderstandingoftradingoptionsandbeabletoputthemtouseinyourownportfolioimplementingbothsimpleandmoreadvancedstrategies.

Includedaremanyrealworldandeasytofollowexamplessoyouwillbeabletoclearlyunderstandeachoftheprinciplesandstrategiesdiscussedinaction.

Finally,we’lldelvealittleintothepsychologyofinvestinganditsimportanceinknowingwhichwaythemarketisgoingandhowthiscanhelpyoubettertimeyourinvestmentsforevenmoreprofits.

Readontogetstartedintheexcitingworldofoptionstrading.

Options101

There are many different options for investing and many types of financialinstrumentsthatcanbeusedtoaccomplishyourgoalofmakingprofits.Onekeyfinancialtoolthatsavvyinvestorsandtradersuseisoptions.

As with stocks, options can make a person considerable earnings. They are,however,muchmore versatile and dynamic than stocks.How so?Well,whentradingstockstherearereallyonlytwowaystomakemoney.Youcango“long”bybuyingaparticularstockandwaitingforittogoupinvalueandifthatoccursyoucansellitforaprofit.Theotherwaytoturnaprofitistogo“short.”Inthiscase,yousellsharesofacompanyandbuythembacklateratalowerprice.

Options trading ismuchmoredynamicwithdozensofdifferentways tomakepotential profits. Investors can trade options not only on stocks but also oncurrencies,commodities,andvarious indices.Manynovice investorsenter intothestockmarketwithout thepropereducationandexperience.These investorsaremissing out on considerable earnings by not trading options on the abovevehicles.

Options are available today on most stock exchanges and can be purchasedthroughlow-costonlinebrokers.Althoughtradingoptionsneedsawellthoughtout and comprehensive approach, you can certainly make a profit if you arededicatedandcommitted.

This book will guide you through the various types of options and strategiesinvolvedand,hopefully,allowyoutomakeconsiderableprofitsonyourinvestedcapital. Understanding options trading is important not only for sophisticatedinvestorsbutalsoforbeginningtraderswhowanttostrengthentheirinvestmentportfolio.

WhatAreOptions?

Anoptionisacontractthatgivesthepurchasertheright,butnottheobligation,tobuyorsellanunderlyingassetataspecificpriceonorbeforeacertaindate.Anoption, just like a stock or bond, is a type of security. It is also a bindingcontractwithstrictlydefinedtermsandproperties.

Basically, a stock option contract may be in two forms: call options and putoptions.Inbothcasesyouhavetheright,butnottherequirement,toeitherbuyorselltheunderlyingstockforapredeterminedprice.Thepredeterminedpriceisalsoknownasthestrikeprice.

An important feature of options, regardless of type, is theexpirationdate—adatewhentheoptionexpiresandbecomesworthless.Beforetheexpirationdate,investorscanhandovertheoptiontosomeoneelseduringthemonthinordertomakeaprofit.However,duetotimedecayaswellasotherreasons, theoptionwilllosevaluethecloseritgetstotheexpirationdate.

Asanexample,sayonJune1,2015,companyABCistradingfor$10pershare.Youcouldbuyacalloptiononthatstockthatwouldallowyoutobuy100sharesatagiventime(sayAugust23,2015)for$12pershare.Whywouldyouwanttodo this?Well you may think that company ABC is underpriced and headingupward.Soyoubuyyouroptionandyouwait.If45dayslatercompanyABCisnowtradingfor$15pershare,thenyoucanexerciseyouroptiontobuythestockat $12 and you havemade a significant profit. If, however, companyABC istrading below $12 then you would not exercise your option and they wouldexpireworthless.Youhavenowlostyourinitialinvestment.

Inoptionterminology,thepremium is thepriceof theoptioncontract. It is inconstant flux based onmarket conditions and what the underlying security isdoing.Thepremiumisequaltotheintrinsicvalue(theamounttheoptionisin-the-money)+ the timevalue (the longer the time leftuntil theexpirationdate,thehigherthevalue).Whenyousellyouroption,youmustdeducttheamountofthepremiumfromyourprofit.

BuyingandSellingOptions

Inoptiontrading,youcaneitherbethebuyerortheselleroftheoption.

Ifyoubuyacalloption,thenyouhavepurchasedtherighttobuytheunderlyingstock(orotherunderlyinginstrument)atthespecificstrikepriceonorbeforetheexpirationdateoftheoption.Ifyouhavepurchasedaputoptionthenyouhavetherighttosellthestockatthestrikepriceonorbeforetheexpirationdate.Inbothcases,youcanalsoselltheoptionitselftoanotherbuyerorletitexpire.

Adifferentscenario iswhenyousell,orwrite,options.In thesecases,youareobligated to fulfill the terms of the option contract should the buyer wish toexerciseit.So,ifyousellacalloption,youwillhavetoselltheunderlyingassetatthestrikepricetothebuyer.Andinthecaseofaputoption,youwouldhaveto buy the stock at the strike price. If you write options then you need tounderstandthatitisuptothebuyerwhetherornotthecontractisexercisedandyoumustbereadytofulfillthetermsofthecontract.However,itispossibletobuyanothercontracttooffsetyourobligationandinthiswayyoucanexitoutofthedeal.

AdvantagesofOptionsTrading

Onceyougetahandleonoptionbasics,youwilldiscoverthattherearequiteafew advantages to using them both to increase leverage and to hedge againstpotentialthreats.

Leverage

Perhapsthemainadvantageofoptionsistheabilitytomakelargeprofitswithouta considerable amount of upfront capital. This is due to the use of leverage.Financial leverage is oneof themost significant aspects of trading in options.Thisfactorcangiveaninvestorabiggerreturnwhileusingaminimumamountofcapitalintheinitialstageofinvestment.

Forexample,ifyouhave$1,000toinvestwithandyouboughtstockincompanyXYZ that is currently selling at $10 per share, then you would be able topurchase 100 shares. If the stock rises to $12.50 you could sell the stock andmakeaprofitof$250forareturnof25percentonyourinitialinvestment.(Forsimplicity,wewillleaveoutbrokeragecommissionsinthisexample.)

Incontrast,bybuyingoptionsonthestockandusingleverageyourreturnscouldbe significantly higher. If you bought call options on the above stock with astrike price of $10 for $10 each, then you could by 100 optionswhichwouldallow you to buy 1,000 shares of stock. If the stock rises to $12.50 then youcouldexerciseyouroptiontobuythesharesat$10andthenimmediatelyresellthemfor$12.50.Inthiscaseyourprofitwouldbe$1,500(ora150%return)onthesameinitial$1,000investment.

That is the power of leverage. With options, a trader can make investmentswithout borrowing capital and can control a larger number of shares with asmalleramountofinitialinvestment.

RiskLimitation—Hedging

Anotherbigadvantageofoptionsisthattheyallowinvestorstosafeguardtheirpositionsagainstfluctuationsinprice,especiallywhentheinvestordoesn’twanttoaltertheunderlyingposition.Inthisway,optionscanbeusedtoprotectyourportfolioagainstlargepricedrops.Thispracticeisknownashedging.

Here is an example of how hedging with options can be used as a risk

management strategy. Say you own 100 shares of stock XYZ and you areconcernedthatitmaybeheadingforafall.Youcouldbuyaputoptiononthatstock which would give you the option to sell it at the given strike price,regardless of how far the stock price falls in themarket. For the price of thepremium,youhaveinsuredyourselfagainstanyfurther lossesbelowthestrikeprice.Thisisaconservativestrategyforlimitingpotentiallossesinthemarket.

DisadvantagesofOptionsTrading

Itiswisetoweighthepotentialrisksofoptionsagainstthebenefitsthatmaybegainedbeforeyoudecidetotryyourhandatoptionstrading.

LevelsofRisk

Therearetwolevelsofriskwhentradingoptionsdependinguponwhetheryouaretheholderorwriteroftheoption.

Astheholderoftheoption,yourmainriskislosingtheentirepremiumthatyoupaidfortheoption.Iftheoptionexpiresworthlessthenyouareoutyourentireprincipal.

As thewriter of the option, you are exposed to a significantly higher level ofrisk.Ifyouarewritinguncoveredcalls,forexample,thenyourpotentiallossisunlimitedastheunderlyingsecuritycouldpotentiallyriseveryhigh.

IntrinsicValue

Whilepurchasingastockgivesacertainamountofintrinsicvalue,withoptionsitisquitedifferent.Anoptionthatiscurrentlyat-the-moneyorout-of-the-money(theseconceptsareexploredmoreinthenextchapter)hasnorealintrinsicvalue.Itsonlyvalueisitstimevalue,whichisconstantlydecliningthecloseritgetstoitsexpirationdate.

TimeDecay

Ariskthatisuniquetooptionsistimedecay.Thecloseranoptioncontractgetsto its expiration date the more it loses value. Once the option reaches itsexpirationdate itwillhavenovalueunless it isexercised in-the-money. If theunderlying security takes an unexpected turn during the timeframe of thecontract, the investorwill potentially lose all of the investment capital.Unlikewithstocks,youcannotsimplywaititout.Forthisreason,optionsareknownaswastingassets.

Taxes

Anotherelementtoconsiderwheninvestinginoptionsisthetaximplicationsofyourtrades.Sinceoptionsareshort-terminvestmentstheyaretaxedatadifferent

ratethanlongerterminvestments.However,lossesonoptionscanalsobeusedtooffsetgainsinotherinvestments,sotheycanworktoyouradvantageinthisregard aswell. It is best to consultwith a tax advisor to figure out your beststrategyfortaxsavings.

Thebottom line is that options trading canbe used to leverageyour positionsandmakesignificantprofits.However,theycomewiththeirownsetofrisksandrequire the investor tobeconstantlyon topofwhat isgoingon in themarket.Due to theirunique timeconstraints, theyarenot for investorswho like to setandthenforgettheirinvestments.

TypesandStylesofOptions

Thereareavarietyofdifferenttypesandstylesofoptionsavailable.Thissectionprovides an overview of each type as well as some basic terminology everyoptioninvestorshouldbefamiliarwith.

CallOptions

A call option gives the investor the right (not the obligation) to buy theunderlying stock, bond, commodity, or other instrument, at a specific pricewithin the time frame of the contract. The specified price is called the strikeprice.Aninvestorwhoisbullishonthestock,meaningheexpectsthestocktoriseinnearfutureorwithinthespecifictimeframe,wouldbuyacalloption.

For example, say InvestorA thinks stockXYZ is going to post high earningsnextmonthandthestockisgoingtogohigher.Soshebuysacalloptiononthestockfor$20.Theoptioncontractspecifiesthatshecanpurchase100sharesofXYZatastrikepriceof$100withinthenext60days.Ifthepriceofthestockfallsbelow$100,thenshewillnotexercisetheoption.Thecontractwillexpireworthlessandshewillhavelostthe$20purchaseprice.However,ifthepriceofthestockrisesabove$100,say to$130, thenshewillexercise theoption,buythestockfor$100,andthensellitatthehighermarketprice.Shehasnowmadeaniceprofit.

PutOptions

Aputoptionistheoppositeofacalloption.Itgivestheownertheright(butnottheobligation)toselltheunderlyingstockataspecifiedprice(thestrikeprice)within the specified time period. An investor who is bearish on the stock,meaninghethinksthestockpriceisheadeddownward,wouldbuyaputoption.

Forexample,sayInvestorBthinksstockXYZisoverpricedandwilldeclineinprice over the next 60 days. He buys a put option on the stock for $20. Thecontractgiveshimtheoptiontosellthestockfor$120withinthenext60days.Ifthestockrisesabove$120persharethenhewouldnotexercisetheoption.Itwouldexpireworthlessandhehaslosthisinitialinvestment.Ifinsteadthepriceof thestockdropsbelow$120, tosay$90, thenhewouldexercisehis right tosellthesharesat$120andpocketthedifferenceasprofit.

UsingCallandPutOptionstoMakeaProfit

There are a number of ways you can use call and put options. For example,supposeyouthinkthatsharesofBankUSthatarecurrentlysellingfor$200pershareareunderpricedandaregoingtogohigherinthenextcoupleofmonths.Youdon’thaveenoughmoney tobuy100ormore sharesof stock,yetwouldstillliketomakemoneyfromtheriseinthestock.Inthiscase,youcouldbuyacall option on the stock,whichwould cost only a fraction of the price of thestock.Soyoubuythecalloptionandyounowhavetherighttobuy100sharesofthestockat$200anytimeinthenext60days.

Youmightbethinking,howamIgoingtobuythestockinthenext60daysfor$200pershareifIdon’thavethemoney?Theansweristhatyoudon’tactuallyhavetobuythestockinordertomakeaprofit.Ifyourinstinctsarecorrectandthe stock price does rise above $200, then your call optionwill becomemorevaluable. In other words, as the stock price rises, the value of your optioncontractalsorises.Youwillbeabletosell theoptioncontractitself, insteadofthestock,andmakeaprofit.Thehigherthepricerises,themoreyourcontractwillbeworth.

Thisworksthesamewayforaputoption,exceptinthiscaseyouwantthestockpricetofall.Asthepriceoftheunderlyingsecuritydrops,thevalueofyourputoptionwillrise.Thefurtherthepricefalls,themorevaluableisyouroption.

Asyoucansee,bybuyingoptions,youareabletomakeaprofitregardlessofwhetherthestockisgoingupordowninprice.

StylesofOptions

Theprevioussectionshavegivenanoverviewofthetwobasictypesofoptions,callsandputs.Thissectionwillhelpyouunderstandthevariousstylesofoptionsavailable.

Most options that you will purchase will fall into one of two categories,AmericanorEuropean.Thesearesometimesreferredtoasvanillaoptions.Themaindifferencebetweenthetwoiswhenyoucanexercisetheoption.

AmericanOptions

Americanoptionscanbeexercisedatanytimebeforetheexpirationdate.Mostoptionsonstocksandequityareofthistype.Thesearealsothetypeofcontractstradedonfuturesexchanges.

EuropeanOptions

European options can only be exercised on the expiration date defined in thecontract.Thesetypesofoptionsaremainlytradedintheover-the-counter(OTC)market.

Thevaluesof the twooptionstylesarecalculatedslightlydifferentlyand theirexpirationdatesarealsodifferent.AmericanoptionsexpirethethirdSaturdayofthemonth,whileEuropeanoptionsexpiretheFridaybeforethethirdSaturdayofthemonth.

Similaritiesbetween the two include thepay-offand thestrikeprice.Thepay-off, either for calls or puts, is calculated in the same way for both types.Likewise,thestrikepricesnormallyarethesame.

ExoticOptions

While the above two styles are themain onesmost investors will be dealingwith,thereareavarietyofmoreexoticoptiontypestobeawareofaswell.

BermudaOptions

BermudaoptionsareinbetweenAmericanandEuropeanoptions.Inthistypeofoption you are allowed to exercise themonmultiple dates during the contract

period.

BarrierOptions

Barrieroptionsaredifferentfromtheothertypesdiscussedsofarinthatinorderfortheoptiontopayoffthepriceoftheunderlyingsecuritymustcrossacertainlevel. They can be either put or call options. There are four types of barrieroptions,whichareoutlinedbelow:

*Down-and-OutBarrierOptions:Adown-and-outoptiongives theholdertherightbutnottheobligationtobuy(inthecaseofacall)orsell (in the case of a put) shares of an underlying asset at apredeterminedstrikepricesolongasthepriceofthatassetdidnotgobelowapredeterminedbarrierduringtheoptionlifetime.Thatis,oncethepriceof theunderlyingasset fallsbelow thebarrier, theoption is“knocked-out”andnolongercarriesanyvalue.Hencethenamedown-and-out.

*Down-and-In Barrier Options: A down-and-in option is theopposite of a down-and-out barrier option. Down-and-inoptionsonlycarryvalueifthepriceoftheunderlyingassetfallsbelowthe barrier during the options lifetime. If the barrier is crossed theholderofthedown-and-inoptionhastherighttobuy(ifitisacall)orsell(if it isaput)sharesoftheunderlyingassetatthepredeterminedstrikepriceontheexpirationdate.

*Up-and-Out Barrier Options: An up-and-out barrier option issimilartoadown-and-outbarrieroption,theonlydifferencebeingtheplacement of the barrier. Rather than being knocked out by fallingbelowthebarrierprice,up-and-outoptionsareknockedoutifthepriceoftheunderlyingassetrisesabovethepredeterminedbarrier.

*Up-and-InBarrierOptions:Anup-and-inbarrieroption is similarto a down-and-in option, however the barrier is placed above thecurrentpriceoftheunderlyingassetandtheoptionwillonlybevalidif the price of the underlying asset reaches the barrier beforeexpiration.[1]

BasketOptions

Abasketoption,alsoknownasarainbowoption,isacontractinwhichthevalueisbasedontwoormoreunderlyingassets.Thedecisiontoexercisetheoptionis

dependentonthepricesofallunderlyingassets.

Capped-StyleOptions

Inthistypeofcontractamaximumprofitisestablished.Cappedoptionscontaina provision in which the option is exercised automatically if the underlyingsecurity reaches a certain established price. These types of options offer thewriteroftheoptionamaximumamountthatcanbelost.

CompoundOptions

Thesearebasicallyoptions topurchaseanoption.Alsocalledsplit-feeoptionsbecausetheholdermustpaytwopremiums,oneupfrontandoneiftheoptionisexercised.

Look-BackOptions

Thisstyleofoptiongiverstheholdertherighttoeitherbuyorselltheunderlyingsecurity at itspeak (in the caseof calls), or lowest (in the caseofputs), priceoveraspecifiedtimeperiod.

AsianOptions

Asian options, also known as average options, are those where the payoff issubject to themean (average) price of the underlying security over a specificperiodtime.

BinaryOptions

Binary options have a payout that is either a fixed amount or nothing at all.Therearetwotypes:cash-or-nothingandasset-or-nothing.Inthefirst type, theholderwouldgetafixedamountofcashif theoptionexpiresin-the-money.Intheasset-or-nothingvariety,theholderwouldreceivethevalueoftheunderlyingsecurity.Alsoknownasdigitaloptions,all-or-nothingoptions,andfixedreturnoptions. The advantage to this type of option is that the potential return is aknown certainty before the option is purchased. However, once bought theycannotbesoldbeforetheexpiration.

ForwardStartOptions

Forwardstartoptionsstartwithanundefinedstrikepricethatistobedeterminedinthefuture.

LEAPS

LEAPS stands for Long-term Equity AnticiPation Securities. LEAPS areessentiallythesameasregularoptionsexceptforthelongerexpirationdates.ALEAPcanhaveanexpirationdatethatisuptothreeyearsaway.Theadvantagetothistypeofoptionisthereisalotmoretimefortheunderlyingstock,andthusoption,tomoveinthedirectionyouwantitto.

IndexOptions

Inadditiontopurchasingoptionsonindividualsecurities,youcanalsopurchaseoptionsonastockindex.Thesecanbeappealingbecausetheyprovideexposureto an entire group of stocks. Index options are flexible and can fit into thestrategiesofbothconservativeandspeculativeinvestors,duringbothabullandabearmarket.MostindexoptionsareEuropeanstyleoptions.

OptionPricesandValuation

Thereareseveralfactorsthatgointodeterminingtheprice,orpremium,paidforan option. One of the most important factors is the current price of theunderlyingsecurity.

Basedonthecurrentpriceoftheunderlyingasset,anoptionissaidtobeeitherin-the-money,at-the-money,orout-of-the-money.

In-The-Money(ITM)

Thephrase“in-the-money,”meansthatyouroptioncurrentlyhasworthbasedonthepriceof theunderlyingasset. In the caseof a call option, this iswhen thestrikepriceisbelowthemarketpriceofthestock.Forexample,ifacalloptionhasastrikepriceof$30andthestockpriceiscurrently$35,thentheoptionisconsideredtobein-the-money

Incontrast,aputoptionis“in-the-money”ifitsstrikepriceisabovethecurrentmarketpriceofthestock.Forexample,ifthestrikepriceoftheoptionis$35andthestockistradingat$30,thentheputoptionisin-the-money.

Ineithercase,thelargerthedifferencebetweenthestrikepriceandthecurrentprice,themoretheoptioncontractwillbeworth.

At-The-Money(ATM)

Forbothputandcalloptions,ifboththestrikepriceandstockpriceareequal,then the option is said to be “at-the-money.”For example, a call option has astrikepriceof$50andtheunderlyingshareis tradingat$50inthemarket.Atthispoint, theoptionhasno intrinsicvalue. Itsvalue is in the timevalue.Thefurtherawaythecontractisfromtheexpirationdate,themoretimevalueithas.

Out-of-The-Money(OTM)

Asyoumayhaveguessed,“out-ofthe-money”meanstheoptioncontracthasnoworth based on the current price of the underlying asset. The holder of thecontractwouldnotexerciseanout-of-the-moneyoption.

A call option is out-of-the-money if the strike price is higher than the currentmarketpriceoftheunderlyingstock.Forexample,ifthestrikepriceofthecallis$35andthestockistradingat$30thecalloptionisout-of-the-money.Inthiscase, theownerof thecontractwouldnotexercisehisright tobuythestockatthestrikepricebecauseit’scheaperinanopenmarket.

Incontrast,aputoptionisout-of-the-moneyif themarketpriceof thestockisabovethestrikepriceoftheunderlyingsecurity.Forexample,iftheputoptionhasastrikepriceof$30andthestockiscurrentlytradingat$35inthemarket,then theoption isout-of-the-money. Itwouldnotbeprofitable for thecontractownertosellthestockatstrikepricelowerthanthemarketpriceofthestock.

An out-of-the-money option has no intrinsic value but may have time value.However, its time value will quickly decay as the option gets closer to itsexpirationdate.

IntrinsicValueversusTimeValue

The option premium is composed of twomajor components—intrinsic valueandtimevalue.Intrinsicvalueisthedifferencebetweenthemarketpriceofthestockandthestrikepriceofthestock.Itwillbepositiveprovidedyouarein-the-moneyandzero ifyouareeitherat-the-moneyorout-of-the-money.Foran in-the-moneyoption,theintrinsicvaluewillincreaseasthedifferencebetweenthestrikepriceandthestockpriceincreases.

Intrinsicvalueiseasytocalculate.Forinstance,ifastockwaspricedat$50andyoupurchasedacalloptionwithastrikepriceof$45,thenthatcalloptionwouldhave$5ofintrinsicvalue.If,however,thestockpricewassellingat$45orless,thenthecalloptionwouldnothaveanyintrinsicvalue.

The other important component of the options premium is its time value.Thetimevalueofanoptionisdirectlyrelatedtotheexpirationdate.Thisisthedateonwhichthecontractwillexpire.Ifthisdatepassesandyou,theholderofthecontract,donotsellorexerciseyouroptionthenthecontractexpireswithoutanyvalue.Thisisprobablythemainreasonwhyoptionstradingcanbeahigh-riskventure.

Tounderstanditmorefullythinkofitastimedecay.Simplyput,thelongeranoptionhasbeforeitexpiresthemoretimevalueithas.Inotherwords,astimemarcheson,thevalueoftheoptionsyouownwillbelosingsomeoftheirvalue—especially if the underlying security goes down in price or stays near theoriginal price that you initially bought the options. Time decay is a criticalelementthatmustbemonitoredwhenyouareinvestinginoptions.

Timevalueisalittlemorecomplicatedtoestimatethanintrinsicvalue.Becauseof the fixed expiration date, there is only a certain amount of time for theunderlyingsecuritytomoveinthedirectionyouwantitto.Ingeneral,thelongertheexpirationdateisawayfromthecurrentdate, themoretimevaluethereis.Astheexpirationdatecreepscloser,thetimevalue,andthusthepremium,willdecrease.Thismakessensebecauseifasecurityhasmoretimetomoveinthepricedirectionyouwantittothenthereismoreofchancethatitcouldhappen.

OptionPricingModels

Thereareseveralmodelsthatinvestorsusetodeterminethecurrentvalueofanoption.

Black-ScholesModel

TheBlack-ScholesModelisprobablythemostusedmodelforpricingoptions.Itwas developed in 1973 by the economists FischerBlack,MyronScholes, andRobertMerton.Thismodel isused to calculate thepriceofEuropeanoptions.Theformulaforthemodeliscomplicatedandmosttraderswillnotwanttodothe calculations themselves but will instead rely on one of the online optionstradingcalculators.

Cox-RubensteinBinomialOptionPricingModel

This model is a variation of the Black-Scholes formula. This model uses thevalue of the underlying security over a period time, instead of just at theexpirationdate.For this reason, thismodel isoftenusedforvaluingAmericanoptionswhich canbe exercised at any timeduring the contract period.Again,calculatingthisformulabyhandisprobablynotwhatmostinvestorsaregoingtodoandavarietyofonlinecalculatorscanbeusedforthispurpose.

Put/CallParity

Put/call parity refers to the relationship between put and call optionswith thesamestrikepriceandexpirationdate.ItisusedonlyforEuropean-styleoptions.Itstatesthat“thevalueofacalloption,atonestrikeprice,impliesafairvalueforthecorrespondingputandviceversa.”[2]Basically,theprinciplestatesthattheoptions and underlying stock positionsmust have the same return.Otherwise,arbitrage, or the ability to profit from price variances, would arise and aninvestorcouldpotentiallyprofitriskfree.Put/callparityisusedasasimpletesttoseeifoptionsarepricedfairly.Mostonlinetradingplatformsofferatoolforanalyzingput/callparity.

GettingtoKnowtheGreeks

If you trade in options, thenyou are going to behearing a lot aboutwhat arecollectively known as the Greeks. These values are used to evaluate variousoptionpositionsandmeasuretheriskinvolved.

Delta

Deltameasurestheoption’spricesensitivityinrelationtotheunderlyingasset.Itisgivenas thenumberofpoints theoptionisexpectedtomoveforeachpointchangeintheunderlyingsecurity.

ThisisthemostusedoftheGreeksanditisimportanttoknowbecauseittellstheinvestorhowtheoptionvaluewillchangebasedonpricefluctuationsofthestock.

Delta isusuallyexpressedasavaluebetween0.0and1.0 for calloptionsandbetween0.0 and -1.0 forputoptions.Theyare sometimes expressed aswholenumbersratherthandecimals.ThecloserthatDeltagetsto1(orconversely-1)themorevaluableistheoption.

Gamma

Gammaisameasureofhowmuchtheoption’sDeltachangeswhenthepriceofthe underlying asset changes. It is used when trying to assess the pricefluctuation of an option in relation to how far in or out of the money it is.Gammavalues increase as an option gets closer to being at-the-money.As anoptionmoves further either in-to-the-money or out-of-the-money, the Gammavaluewilldecrease.

Rho

Rhoisanestimateofhowthepriceofanoption,itspremium,willchangewithrespecttointerestratechanges.Typically,ifthereisanincreaseininterestrates,then the premium on call options will rise and put option premiums willdecrease.

Vega

Vega is a measure of the sensitivity of an option to the volatility of theunderlying asset. Themore time there is to the expiration date, the more theoption will be impacted by increased price volatility. Increased volatility willincreasethevalueofanoption.

Theta

Thetaisameasurementofthesensitivityoftheoptiontotimedecay.Itmeasuresthe amount of value that the optionwill lose for each day it gets closer to itsexpiration.

Mosttradingplatformsprovideup-to-datevaluesfortheGreeksforeveryoptioncontract.

GettingStartedwithTradingOptions

Now that you’ve learned the basics of options, it’s time to get ready tomakesometrades.

OptionsExchanges

Tradesaremadeononeofseveralregulatedexchanges.Mostoptionsarelistedonmultipleexchanges.Sinceoptioncontractsarestandardized,thismeanstheycanbetradedbetweenexchanges.Thefollowingarethecurrentelevenoptionsexchanges:

·BATSOptionsExchange·BOXOptionsExchange·C2OptionsExchange·ChicagoBoardOptionsExchange(CBOE)·InternationalSecuritiesExchange(ISE)·MIAXOptionsExchange·NASDAQOMXBX·NASDAQOMXPHLX·NASDAQOptionsMarket·NYSEAmexOptions·NYSEArcaOptions

OptionsClearingCorporation(OCC)

The OCC was founded in 1973 and acts as the clearinghouse for optionscontracts.Itistheissuerandguarantorforoptionsandfuturescontracts.BecauseoftheOCC,investorscanbeconfidentthattheirtradeswillbesettled,premiumswill be collected and paid, and all assignments will be made according toregulations. It is under the jurisdiction of the Securities and ExchangeCommission(SEC).

OpeningaTradingAccount

Beforeyoucanbegintradingoptions,youaregoingtoneedtoopenabrokerageaccount. There aremany brokerage firms available including both full serviceanddiscountbrokers.Whattypeyouchoosedependsuponthelevelofadvisingyourequire.Discountfirmsofferlowerfeesbutdonotofferpersonalizedadvice.Allofthetopfirmsprovideavarietyofonlinetoolsandcalculatorstohelpyouwithyourinvestingdecisions.

Someofthetop-ratedbrokeragefirmsinclude:·CharlesSchwab-www.schwab.com·FidelityInvestments-www.fidelity.com·TDAmeritrade-www.tdameritrade.com·InteractiveBrokers–www.interactivebrokers.com·tradeMonster–www.trademonster.com·PlaceTrade–www.placetrade.com·TradeStation–www.tradestation.com·OptionsXpress–www.optionsxpress.com·OptionsHouse–www.optionshouse.com·E*Trade–www.etrade.com·MerrillEdge–www.merrilledge.com

Onceyouhaveselectedyourbrokeragefirmyouwillselectyouraccounttype:eitheracashaccountoramarginaccount.Inamarginaccountyouwouldusecollateraltoborrowfundstofinancetransactions.Inacashaccountyouwouldtradewiththeavailablecashinyouraccount.Ifyouselectamarginaccountyouwill be required to make a minimum deposit of at least $2,000 to open theaccount.Acashaccounttypicallyrequireseithernodepositorasmalldeposittoopentheaccount.

Theamountofcashandassetsyouneedtomaintaininamarginaccountvariesby brokerage house. If the amount drops below the required amount, then thefirmwillissueamargincall.Thismeansyouwillneedtoaddmorecapitaltothe account tomeet theirminimum requirements. If this is not done, then thebrokerage firmwill liquidateyourassets.For this reason, it is important tobeawareofyourmarginrequirements.

OptionsAgreement

Once you’ve opened your account, the next step is to complete an optionsagreementprior to startingoptions trading.Thisagreementoutlinesyourbasicunderstandingoftradingoptions,yourfinancialcapabilitiestodealswithlosses,andyourrisklevel.Afteryoucomplete theagreement, thebrokeragefirmwill

assign you to an option approval level.While there is no official standard forwhatlevelyouwillbeassigned,thesearethetypicallevels:

·Level1:Coveredcalls,longprotectiveputs·Level2:Callsandputs·Level3:Spreads,straddles·Level4:Uncoveredornakedcallsandputs

Investorswithoutalotofexperiencewilltypicallybeassignedtolevel1orlevel2.Thisisdonetoprotectyoufromlosingmoneyduetolimitedunderstandingofthe risks involved and also to protect the brokerage house against losses fromunderfundedinvestorswhodefaultontheirmarginaccounts.Inmostcases,itispossible to have your level of tradingmoved up by contacting the brokeragefirm.

PlacingYourOrder

Mostbeginnersthinkthatwhentheyfirststarttradingoptionsit’sjustamatterofpicking which options to buy and when to sell them. However, it’s not thatsimple.Therearefourdifferenttypesofordersthatcanbeplacedwhenbuyingandsellingoptions.Thesefourtypesarebuytoopen,buytoclose,selltoopen,andselltoclose.Afterchoosingoneoftheseordertypes,youmustalsochoosehowtofilliteitherthroughalimitorderoramarketorder.Youmustalsoletyourbrokerknowthetimingofyourorder.

OrderTypes

Hereisabreakdownofthedifferentordertypes.

Buy toOpen. The buy to open order is the simplest andmost placed optionorder.Thisisusedtobuyanoptioncontracttoestablishanewposition.

BuytoClose.Thisisusedtocloseoutanexistingshortpositionandclosethecontract.Youwouldplaceabuytocloseorder ifyouhadshortsoldaspecificoptionscontractandwantedtogetoutof(close)thatposition.Forinstanceiftheoptions contracts you sold have subsequently gone down in value you can bythesecontractsbackatthelowerpricebyusingabuytocloseorderthuslockinginyourprofits.Ontheotherhand,ifyouroptionsthatyousoldshorthavegoneup in value and youwant to stop further losses you can place a buy to closeorder and buy the contracts back, thus preventing any further potential losses.Remember,ifyouhavetakenashortposition,thenyouaremakingaprofitwhenthepriceoftheoptionhasgonedown,andyouareinalosspositionwhenthepriceoftheoptionhasgoneup.

SelltoOpen.Thisorderisusedtoopenapositiononanoptionscontractwiththeintenttoshortsellit.Youwouldusethistypeoforderwhenyouaresellingacoveredcall.

Sell toClose. The sell to close order is used to exit a position by selling theoptioncontract. It is really just theorderyouuse to selloptionscontracts thatyoualreadyown.Theordercanbeusedforputsorcalls.

TypesofFillOrders

Afteryouhavedecidedwhichtypeoforderyouwant,youneedtochoosehow

tofilltheorder.Thechoicesaremarketorders,limitorders,stoporders,andstop-limitorders.

Witha limitorder your tradewillbeexecutedat apricenohigher (ifyouarebuying),ornolower(ifyouareselling)thanthepricelevelyoudesignate.Thisprotectsyoufrombuyingcontractsatapricehigherthanyouexpectedorsellingatapricelowerthanexpected.

Amarketorderwillfilltheorderatthecurrentmarketprice.Thisinvolvessomerisk because options can sometimesmove quickly in price, whichmeans thatyoucouldendupbuyingthecontractsatahigherpricethanyouwereexpectingorsellingthecontractsatapricelowerthanyouwereexpecting.

Astoporderwill be filledwhen the price reaches the stop price.A stop-limitordercombinesthefeaturesofastoporderwiththefeaturesofalimitorder.

TimingOrders

When placing your order, youwill also need to specify the order duration ortiming.Typesoftimingordersare:dayorder,allornone,fillorkill,gooduntilcancelled,gooduntildate,orimmediateorcancel.

Thedayorder is an order thatmust be filled during the trading day that it isinitiatedonoritwillbecancelled.

The all or none order must be completely filled or none of it is filled. Forinstance,ifyouaretryingtobuy30optionscontractsatacertainpricebutthebroker can only buy 25 at that price, then the order is not processed. It isimportant to remember that thisorder remainsopenanddoesnotexpireat theendofthetradingdayunlikethedayorderalthoughyoucancancelitwheneveryouwishto.

Thefillorkillorderislikeanallornoneorderwiththeadditionalrequirementthatitiscancelledautomaticallyifitisnotfilledimmediately.

Thegoodtilcancelledorder,orGTC,isanorderthatdoesnotcanceluntilyoucancelit.Thus,thisorderwillremainopenuntilyoudecidetocancelitoritisfilled.

Thegoodtildateorder,orGTD,willremainopenuntilaspecifieddateandthencancelledifithasnotbeenfilled.

Theimmediateorcancelorder is like thefillorkillorderwithonedifference.Withthistypeoforderifsomeofitisfilledimmediatelyandtherestisnot,the

remainingcontractsthatarenotfilledarecancelled.

UnderstandingOptionsChains

Optionschainsprovidevaluableinformationtheinvestorneedstomaketrades.Most financialwebsitesandbrokersprovide real-timeoptionschains.Here’sabriefoverviewofhowtoreadanoptionschain.

Atthetopofthechartisthenameoftheunderlyingstock,itstickersymbol,theexchangeit’slistedon,itscurrentmarketprice,andvolume.

The columns in the option chain are: strike, symbol, last, change, bid, ask,volume,andopeninterest.

Thefirstcolumnliststhestrikepriceforthegivenoption.

Thesecondcolumncontainstheoptionsymbol.Thechaindisplaysinformationforboththecall(C)andtheput(P)foreachstrikeprice.

Thebidisthecurrentpricethatbuyersarewillingtopayfortheoption.Theaskisthecurrentpricethatsellersarewillingsellfor.

Thevolumeisthenumberofoptionscontractsthathavetradedthatday.

Theopeninterestcolumnshowsthenumberofoutstandingopencontracts.

MakingTrades

Theactualprocess forexecutinganorder isprettystraightforwardandfollowsthesameprocess,whetheryouchoosetotradeonlineoroverthephone.

1.Placingthetrade

Toplaceatrade,youwillneedthefollowing:

·Theoptionsymbol·Thetypeofoption:putorcall·Thetypeoffillorder:buytoopen,buytoclose,selltoopen,selltoclose·Thestrikeprice·Theexpirationdate·Thepriceyourarewillingpay:marketorlimitorder·Thetimingoftheorder:dayorder,gooduntilfilled,etc.

2.Orderconfirmation

Beforeplacingyourorder,makesureyoucheckoveralltheinformationtomakesureitiscorrect.Onceyousubmittheorder,youwillreceiveaconfirmationthattheorderhasbeenplaced.Theorderhasnotyetbeenexecuted.Itispendingtobefilled.

3.Tradeexecution

Depending upon your trade details, it could be just a couple of minutes orpotentiallyhoursorevendaysuntilyour trade isexecuted.Once theorderhasbeenfilled,youshouldreceiveanotificationtellingyoutheexecutionprice.

4.Wait

Nowyoujustneedtomonitoryourpositionsandfollow-throughwithyourplan.

TradingTools

Most brokers offer a variety of tools and calculators to help you with youroptionstrading.

Researchandanalysis.Beforeyoutradeyouwillwanttodosomeresearchanddataanalysisontheunderlyingstockssuchaspricehistory,volatility,earningsreports,andotherdata.

Papertrading.Beforeyoupartwithanyhard-earnedcash,it’sagoodideatotryyourhandinasimulatedtradingenvironment.Mostonlinebrokeragefirmshavetools that let you simulate trades and gain experience before you start riskingmoney.

Optionscalculator.ThesetoolswillcalculatepotentialprofitsandlossesaswellasprovidevaluesfortheGreeks.

Optionsscreener.Use these tools to narrow down your choices by screeningoptionsbasedonparticularcriteriasuchasvolatility,marketforecasts,orotherconditions.

Optionschains.Thistoolshowstheentireseriesofputandcalloptionsofferedon a particular stock along with their premiums, volume, and othercharacteristics.

OptionTradingStrategies

Beforeyoubegintradingoptions,youneedtohaveastrategy.Youshouldknowyourinvestmentgoalsandpickastrategythatwillhelpyoureachyourgoals.Aninvestorwhois lookingtoprotecthimselfagainstpotential lossesonstockshealreadyownswill choose a different strategy fromonewho is trying to profitfromtheincreasedleveragethatoptionscanprovide.

SimpleStrategies

Ifyouareabeginnerwhen itcomes tooption trading, thenstartingoffwithafew simple strategies is probably the best way to start. As you gain moreexperienceandbecomemorecomfortablewithtradingoptionsyoucanmoveontomorecomplicatedstrategies.

CallBuying

Buying call options is a popular strategy for all levels of investors. In thisstrategy,youpurchasecalloptionsonastockthatyoubelieveisheadedhigher.If the stockprice is higher than the strike price plus the premiumpaid by theexpiration date then you will make a profit. If you are wrong, then youpotentiallyloseyourentirepremium.

The majority of call option contracts are sold before expiration, when thepremiumgoesup.However,youcouldalsopurchasetheunderlyingsecurityatanytimebeforetheexpirationdateifthatisyourobjective.

Tomakeaprofitwiththisstrategy,youneedtohavegoodtimingandyouneedtoknowwhenyoushouldexit thecontract. Ifyouwait too longand thestockdoes not rise high enough or fast enough, then the option may not be worthexercisingorselling.

Some investors choose to buy call options instead of buying stock onmargin.They offer the same use of leverage but carry less risk. If you have bought astockonmarginandthestockfalls,youmaygetamargincallandbeforcedtoaddcashor liquidateassets tomeet it.Theonlyriskyoufacewithbuyingcalloptionsislosingthepremium.

PutBuying

Putbuyingismuchthesameascallbuyingexceptinthiscaseyoubelievethestock is headed downward. An investor would use this strategy as insuranceagainst lossesonassetsalreadyownedor tomakeaprofit inabearmarket. Ifyoubelievethemarket,oraparticularstock,isheadeddown,thenthiswouldbeagoodstrategytoconsider.

Thisstrategyisoftenusedbystockownerstolockinasellingpriceandprotectthemselvesagainststockdeclines.

Itcanalsobeusedforspeculationonstocksthatyoudon’town.Asthepriceofthestockdeclines,thepremiumontheoptionshouldriseallowingyoutomakeaprofit.This canbeappealing inadownmarket and is analternative to sellingstocksshort.

CoveredCall

Another simple strategy is to write a covered call. In this straightforwardstrategy,youwouldsell(write)acalloptionforstocksthatyoualreadyown,orpurchasesharesat thesame timeasyouwrite thecall,knownasabuy-write.Youreceivecashintheformofthepremiumupfrontandyourhopeisthatthecalloptionisneverexercised.Aninvestorwouldchoosethisstrategytogenerateadditionalprofitsonastockthatshedoesnotfeelisheadedhigher,atleastintheshortterm.Inthisway,thecoveredcallactsasadividendonthestock.

Theriskwithacoveredcallisthatitwillbeexercisedandyoumustbepreparedtosellyourstocktocoverit.However,ifthestockheadshigher,youcanprotectyourselfbybuyingacallinthesameseriesastheoneyousoldandclosingoutyour position.The premiumpaid for doing this shouldmore or less equal theamountyoureceivedwhenyousoldyouroriginalcalloption.

MarriedPut

Astrategyinwhichyoubuyaputoptiononastockwhichyoualreadyown(orbuyatthesametimeastheput)isknownasamarriedput.Aninvestorwouldusethisstrategytoprotectagainstlossesifthestockpricedropsdramatically.Itfunctionsbasicallyasaninsurancepolicy.

Spreads

Aspread is a strategy that involves two transactions,normallyexecutedat thesametime.Spreadsarealittlemoreadvancedthanthesimplestrategiescoveredso far, but they are useful tools and well worth learning about. The mostcommontypeofspreadsareverticalspreads,inwhichoneoptionhasahigherstrikeprice than theother. Ina spread,each transaction is referred toasa leg.Theadvantageofaspreadis thatyourriskandpotential lossesareminimized.Thedisadvantageisthatyourprofitsarealsolimited.

BullCallSpread

Thistypeofverticalspreadisusedbybullishinvestors.Theinvestorwouldbuycalloptionsonastockatacertainstrikepricewhilesimultaneouslysellingacallon the same stock at a higher strike price.Both optionswould have the sameexpirationdate.

BearPutSpread

This is also a vertical spread. In this strategy, youwouldbuyput options at acertainstrikepriceandthensellthesamenumberofputsatalowerstrikeprice,both on the same underlying stock with the same expiration date. This is astrategyforbearishinvestorswhothinkthepriceofthestockisgoingtodecline.Usedasanalternativetoshortsellingastock.

Calendar/TimeSpread

Acalendar, or time, spread involves purchasing an optionwith one expirationdateandthensellinganotherwithadifferentexpirationdate.Thestrikepriceforeachwould be the same. In this strategy you are hoping to take advantage oftimedecay.

ButterflySpread

Butterflyspreadsaresomewhatcomplicatedandbestusedbymoreexperiencedinvestors. In this strategy, an investor combines both a bull and a bear spreadstrategy,usingthreedifferentstrikeprices.

Straddle(Long)

A straddle is used by an investor who believes a stock is going to movesignificantly inonedirectionoranotherbut isn’tsurewhichdirectionthat it isgoingtobe.Inthisstrategy,youwouldpurchase(orsell)bothacalloptionandaputoptionona stockwith the same strikeprice and the sameexpirationdate.Theseofferunlimitedprofitpotentialwhileatthesametimelimitingrisk.

IronCondor

The iron condor is a complex strategy that involves simultaneously holding alongandshortposition in twodifferent strangle strategies. In this strategy, theinvestorsellsanout-of-the-moneyputoption,buysanotherout-of-themoneyputoptionwithalowerstrikeprice,sellsanout-of-the-moneycalloption,andbuysanotherout-of-the-moneycalloptionatahigherstrikeprice.Thisstrategyofferlimitedriskandagoodprobabilityofearningasmallprofit.

IronButterfly

This is another complex strategy used as a limited risk, limited profitcombination.Intheironbutterflystrategytheinvestorbuysanout-of-the-moneyput, sells an at-the-money put, sells an at-the-money call, and buys anotherhigherstrikeout-of-the-moneycall.

NakedCalls

A naked call is a risky investment strategy in which an investor writes calloptionsonanunderlyingsecuritywithoutownershipofthatsecurity.Itisriskybecauseifthebuyerofthecalloptionexercisestheoption,thenthesellermustbuythestockatthecurrentmarketpriceinordertofulfillthebuyerorder.Therisk in this case is unlimited because there is noway to control howhigh themarketpriceofthestockwillgo.

Collars(Protective)

Inthisstrategy,theinvestorpurchasesanout-of-themoneyputoptionwhileatthe same timewritinganout-of-the-moneycalloptionon the same stockwiththe same expiration date.This is used by investors to lock in a profitwithoutsellingthestock.

Strangle(Long)

In the strangle strategy, the investor buys both a put option and a call option,bothusuallyout-of-the-money,onthesamestockwiththesameexpirationdate,butwithdifferentstrikeprices.This isusedwhenthe investor isunsurewhichwaythestockisheaded.

StrategiesbyMarketOutlook

Belowisalistofstrategiestousebasedonyourcurrentoutlook,eithertowardthemarketasawholeortowardaparticularsecurity.

NeutralStrategies

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

StrategiesforBulls

·BullCallSpread·BullPutSpread·Collar·CoveredCall·LongCall·MarriedPut·ShortPut

StrategiesforBears

·BearCallSpread·BearPutSpread·LongPut·NakedCall·ShortCall

ExitStrategies

It is vital to plan your exit strategy before you begin trading to avoid takingunnecessarylosses.Youcanexit,orclose,yourpositionatanytimebeforetheexpiration date. The timing of your exit is very important and can make thedifference between making money and losing money. Before you begin, youshould decide how you will exit if your option is out-of-the-money, at-the-money,orin-the-money.

ClosingOut

Onewayexittoisbyclosingoutyouroption.Thisisdonebyeitherbuyinganoption you sold, or selling an option you bought. Basically reversing yourposition.Ifthepremiumhasgoneupsinceyouboughttheoption,thenyouhavemadeaprofit. If thepremiumhasdecreased,youmaywant tocutyour lossesandsell.

Asanoptionswriteryouarealmostneverforcedtofulfilltheobligationtobuythe underlying security because you can close out your position before it isexercised.

Again,timingiseverythingwhenitcomestooptiontradingandyoumustkeepacloseeyeonyourinvestmentswithregardtowhenitistimetosell,eithertotakeyour profits, or to cut your losses and move on. The closer you get to theexpiration date, the more volatile the options become, and so you need tomonitorthemevenmoreclosely.

RollingOut

Ifyoudon’twanttocloseoutyouroptions,thenyoucanrollthem.Thisinvolvesclosing out your existing position and then opening a new position that isidentical to the one you sold exceptwith a new expiration date, a new strikeprice,orpossiblyboth.

ExercisingOptions

Ifyouare theoptionsholder thenyoucanchoose toexerciseyouroptionandbuytheunderlyingsecurity.Thistypicallyonlymakessenseiftheoptionisin-the-money,sinceineitheroftheothertwocasesitwouldnotmakesense.

If you are thewriter of the option then you have no control overwhether thebuyeroftheoptionchoosestoexerciseitornot.

Onceyou’ve considered thepossible scenarios andchosenyour exit strategiesforeachcase,it’simportantthatyoucloselymonitoryourpositionsandfollowthrough on your plan. Options trading is fast-paced and it can be easy to getcaughtupinthemomentandlosetrackofyourlong-termgoals.Don’tletyouremotions rule. Stick to your plan and you are much more likely to see yourprofitsgrowoverthelongterm.

SourcesofInformation

Researchiskeytobeingasuccessfulinvestor.Youwillwantfindoutasmuchinformationasyoucanabout theunderlyingsecurities, theoverallmarket,andthe particular option series you are considering. There are a variety of goodsourcesofreliableinformationavailable,muchofitfreeofcost.

OnlineResources

The Internet is probably the first source most investors turn to today forinformation.Therearemanygreat financialwebsites tochoose fromthatofferplentifulup-to-dateinformationandresearch.Hereareafewofthebestsitestogetyoustarted.

·BigCharts.com·Bloomberg.com·FinancialTimes·MarketWatch.com·Morningstar.com·MSNMoney/CNBC·TheMotleyFool·TheStreet.com·WallStreetJournal·Yahoo!Finance·YCHARTS.com

Apps

Putting technologytousecanhelpyoustayon topofyour investments.Thereareseveralgoodinvestmentappsthatareworthcheckingout.Inaddition,mostbrokeragefirmsalsoputoutanapp.

·Bloomberg·CNNMoney·MotifInvesting·PersonalCapital·SigFig·StockoftheDay·StockTwits·Yahoo!Finance

Newspapers,Magazines,andNewsletters

Newspapers,newsletters,andmagazinesarealsopopularsourcesofinformation.Most newsletters are paid services that offer information, picks, research, andrecommendations.

Newspapers

·Barron’s·FinancialTimes·TheWallStreetJournal·ValueLine·WashingtonPost

Newsletters

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

Magazines

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

TipsandTricksforAvoidingCostlyMistakes

Saveyourselfsomeheartachebyavoidingthesecostlymistakes.

1.Don’tinvestmorethanyoucanaffordtolose.Remember,optionstradingisariskypropositionand ifyourhunchesarewrongoryour timing isoff it isentirelypossibletoloseyourentireinvestment.Startoffsmall,nomorethan10-15percentofyourportfolioshouldbeusedforoptionstrading.

2.Do theproper research. Don’t hurry into an investment because someonetold you it was a good idea. Do your own research and make an informeddecisionbeforeyoumakeatrade.

3.Adjustyourstrategybasedonmarketconditions.Noonestrategyisgoingtoworkinallmarkets.Keepabreastaboutwhatisgoingonintheeconomyandthe financial world and adapt your trading strategies tomatch current marketconditions.

4.Knowyourexitstrategybeforeyoupurchase.Haveaplanandsticktoit.Don’t let your emotions overrule your rational decisions. Choose your upsideanddownsideexitpointsaswellasyourtimeframeanddon’tlettheeuphoriaofmakinglargerprofitssidetrackyou.

5.Don’ttakeonmoreriskthanyouarecomfortablewith.Everyinvestorhastheir own level of risk tolerance. Know your risk comfort level and choosestrategies that staywithin that territory.You don’twant to lose sleep at nightwonderingifyou’vemadetherightinvestmentdecisions.

Conclusion

Youshouldnowhaveabasicunderstandingtooptionsandtheworldofoptionstrading.

Nowyouarereadytoapplywhatyouhavelearnedandgetstartedininvesting.

Remember, do your research and don’t take on more risk than you arecomfortablewith.

Bestofluck!

Glossary

Americanoptions:Atypeofoptionthatcanbeexercisedatanypointupuntiltheexpirationdate.

Ask:Thecurrentpricethataselleriswillingtoaccept.

At-themoney(ATM):When thestockprice isequal to thestrikepriceof theoption.

Bid:Thecurrentpricethatabuyeriswillingtopay.

Break-even point: The price the stock must reach in order for the option toresultinneitheraprofitoraloss.

Call:Anoptioncontractthatgivestheowneroftheoptiontherighttobuytheunderlyingsecurityatthepredeterminedprice.

Close:Tobuyorsellanoptioninordertooffsetapreviousposition.

Collar:A simultaneous purchase of a protective put andwriting of a coveredcall.

Dayorder:Anorderthatmustbefilledonthattradingdayoritiscancelled.

Europeanoptions:Atypeofoptionthatcanonlybeexercisedatexpiration.

Exercise: To invoke the rights granted to the option holder, specifically, theabilitytobuyorselltheunderlyingstock.

Expirationdate:Thedateuponwhichboththeoption,andtherighttoexercisetheoption,expires.

Good‘tilcanceled(GTC):Anorderthatremainsopenandvaliduntilit’seitherfilledoryoucancelit.

Historicalvolatility:Thefluctuationtrendsduringatimespanofoneyear.

Impliedvolatility:This isdeterminedby lookingat thehistoricalvolatility inordertoestimatepossiblefuturevolatility.

In-the-money (ITM):A call option is in-the-money if the strike price is lessthanthemarketpriceoftheunderlyingsecurity.Aputoptionisin-the-moneyifthestrikepriceisgreaterthanthemarketpriceoftheunderlyingsecurity.

Intrinsicvalue:Thevalueoftheoptionifexercised.

Leverage:Touseasmallamountofmoneytocontrolamuchlargerinvestment.

Limitorder:Anorderthatcanonlybefilledatagivenpriceorbetter.

Long:Apositionwhereyouownasecurityoroption.

Long-term Equity AnticiPation Securities (LEAPS): Options whoseexpirationdatesarebetween1and3yearsinthefuture.

Marketorder:Anorderinwhichthebuyeriswillingtopaythecurrentmarketprice.

Nakedcall:Acalloptionwrittenonasecuritythatyoudonotown.

Out-of-the-money(OTM):Acalloptionisout-of-the-moneyifthestrikepriceisgreaterthanthemarketpriceoftheunderlyingsecurity.Aputoptionisout-of-the-money if the strike price is less than the market price of the underlyingsecurity.

Premium:Thepricethattheinvestorpaysfortheoption.

Put:Anoptioncontractthatgivestheownertherightofsellingtheunderlyingsecurityatthepredeterminedprice.

Quadruplewitchingday: The third Friday of the lastmonth in each quarter(March, June,September,December).This is theday that stockoptions, stockindex options, stock index futures, and single stock futures all expire.Historically,theseareheavilytradeddays.

Short:Apositioninwhichtheinvestorsells,orwrites,theoption.

Spread: A strategy in which the investor holds two or more simultaneouspositions.Mayalsorefertothedifferencebetweenthebidandtheaskprice.

Stop-loss order:An order to sell an option when it reaches a specific pricelevel.

Strike price: The strike price, also known as the exercise price, is thepredeterminedpriceatwhichtheownerofanoptioncanbuy(call)orsell(put)theunderlyingstockorothercommodity.

Timevalue:Thevalueleftaftertheintrinsicvalueisdeductedfromtheoptionprice.Losesvalue,ordecays,thecloseritgetstotheexpirationdate.

Volatility:Thefluctuationintheoptionprice.

Write:Tosellanoptiontoopenanewposition.

FromtheAuthor

Thankyoufor readingOptionsTradingStrategies:CompleteGuide toGettingStartedandMakingMoneywithStockOptions.Isincerelyhopethatyoufoundthisbookinformativeandhelpful.

Itwouldbegreatlyappreciatedifyoucouldtakeafewmomentstoshareyouropinionandpostareviewforthisbook.Yourpositivereviewhelpsustoreachotherreadersandprovidesvaluablefeedbackwithwhichwecanimprovefuturebooks.

Thankyou!

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

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

TableofContentsCopyrightDisclaimerIntroductionOptions101WhatAreOptions?BuyingandSellingOptionsAdvantagesofOptionsTradingDisadvantagesofOptionsTradingTypesandStylesofOptionsCallOptionsPutOptionsUsingCallandPutOptionstoMakeaProfitStylesofOptionsOptionPricesandValuationIn-The-Money(ITM)At-The-Money(ATM)Out-of-The-Money(OTM)IntrinsicValueversusTimeValueOptionPricingModelsGettingtoKnowtheGreeksDeltaGammaRhoVegaThetaGettingStartedwithTradingOptionsOptionsExchangesOptionsClearingCorporation(OCC)OpeningaTradingAccountPlacingYourOrderUnderstandingOptionsChainsMakingTradesTradingToolsOptionTradingStrategiesSimpleStrategies

SpreadsStraddle(Long)IronCondorIronButterflyNakedCallsCollars(Protective)Strangle(Long)StrategiesbyMarketOutlookExitStrategiesSourcesofInformationOnlineResourcesAppsNewspapers,Magazines,andNewslettersTipsandTricksforAvoidingCostlyMistakesGlossary