An investors guide to trading options
Teach your child to read. Top Pick. Gift Cards Check Card Balance. Locations where this product is available This item is not currently in stock in Dymocks stores - contact your local store to order. Please note: not all stock is available in all stores. HardCover November 16, Originally published almost a decade ago, LeRoy Gross's authoritative, yet highly accessible book has been the only resource available for conservative investors looking to further their investment goals with options.
Now, with a new Introduction by the bestselling author Larry McMillan, The Conservative Investor's Guide to Trading Options has been updated to help market practitioners of the present garner the same rewards reaped by investors of the past. Use current location. Change store. Available in store Unavailable in store. Show more stores.
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How to read your ebook. Both options are identical except for one element, such as strike price or expiration date. The most common are vertical spreads, in which one option has a higher strike price than the other. The difference between the higher strike price and the lower strike price is also known as the spread. Different spread strategies are appropriate for different market forecasts.
You use a bear spread if you anticipate a decline in the stock price. You use a bull spread if you anticipate an increase in the stock price.
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Each options transaction is known as a leg of the overall strategy, and most options spreads stand on two legs—though there are some strategies with three or more legs. The difference between the two premiums is a credit you receive, and it will be deposited in your brokerage account when you open the position. In most cases, the goal of a credit spread is to have both options expire worthless, retaining your credit as profit from the transaction.
In most cases, the goal of a debit spread is to have the stock move beyond the strike price of the short option so that you realize the maximum value of the spread. Investors who are interested in more aggressive options strategies that might expose them to significant potential losses can hedge those risks by making them one leg of a spread. The trade-off is that the potential profit is limited as well. It might help to think of spreads as a form of self-defense. Additionally, managing spreads as expiration nears requires time and attention, so you should be sure you want to take on the challenge.
His net investment is the margin his brokerage firm requires for a naked call. That means calculating how far you think a stock will move in a particular direction, as well as how long it will take to do so. Having realistic expectations is essential to smart options investing. The minimum margin requirement for a spread is usually the difference between the two strike prices times the number of shares covered.
This is usually a neutral strategy. A straddle is the purchase or writing of both a call and a put on an underlying instrument with the same strike price and the same expiration date.
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A seller, on the other hand, hopes that the underlying price remains stable at the strike price. A strangle is the purchase or writing of a call ]sand a put with the same expiration date and different—but both out-of-the-money—strike prices. A strangle holder hopes for a large move in either direction, and a strangle writer hopes for no significant move in either direction.
The re are four common vertical spread strategies: the bull put, the bull call, the bear put, and the bear call. Each of these has one long leg, or an option you buy, and one short leg, or an option you write. Many brokerage firms permit you to enter both legs of a transaction simultaneously. With others, you must execute separate transactions in an approved sequence. Instead, you might close out the spread, by making an offsetting purchase of the option you wrote, and an offsetting sale of the option you had originally purchased.
If exercise and assignment occurred at expiration, your firm would probably net the difference. Either way, you have given up the opportunity to profit if the stock continues to rise. This loss is one you may be willing to accept as your shares of XYZ gain value. A collar is a spread strategy designed to protect unrealized profits on stock you already own. You purchase a protective put on your long stock position, and offset the cost of that put by writing a call that is covered by your long stock position. The collar spread is also known as a fence for the protection it provides. In most cases, both the long put and the short call are out-of-the-money.
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Call options usually rise in value as the underlying market prices go up. Put options usually rise in value as the market prices go down—but time decay and a change in volatility also have an effect. If you hold a stock that has made significant gains, you might want to lock in those gains, protecting your position against a future drop in price. Writing a covered call can fully or partially offset the cost of purchasing a protective put. Just as with other spread strategies, the risk you face with a collar is limited—and, in return, so is the potential profit.
Some investors use collars as income-producing strategies by selling them for a credit. While that approach can be profitable, it also requires time and attention to manage the strategy. Alternately, you could close out your position by purchasing the same call you sold, quite possibly at a higher price than what you paid for it.
If the price of the stock remains between both strikes: You can let your put expire unexercised, or sell it back, most likely for less than what you paid, since its premium will have decreased from time decay. Your short call will probably expire unexercised, which means you keep the entire premium.
If the price of the stock falls below the strike price of the long put: By exercising your put, you can sell your shares at the strike price. Your short call will probably expire unexercised, and you keep all of the proceeds from the sale of the call.
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The strike price of the protective put should be high enough to lock in most of your unrealized profit. The strike price of the covered call should be high enough to allow you to participate in some upward price movement, but not so far out-of-the-money that the premium you receive does little to offset the cost of your protective put. The amount of these charges varies from brokerage firm to brokerage firm, so you should check with yours before executing any transaction.
Be sure to account for fees when calculating the potential profit and loss you face. You should also keep in mind that spread transactions that require two legs mean you may face double commissions at entry. You can exit an options strategy at any point before expiration, and you may have more than one alternative. But the exit strategy you choose and your timing in putting it into effect might mean the difference between a profit and a loss, a small profit and a bigger one, or a small loss and a bigger one. Keep in mind, though, that inthe-money stock options are often exercised before expiration.
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But you might also have to pay more than you received, taking a net loss. If that loss is less than what you would have faced were the option exercised, closing out might be the best exit. You should also keep in mind the tax consequences of selling or acquiring stock through the exercise of an option, since it might affect your capital gains or losses for the year.