Part I: The Basics 1 Chapter 1: Calls and Puts: Defining the Field of Play 3 Equity Investments 3 Debt Investments 4 Investments with No Tangible Value: Options 5 Trading Options on Exchanges 7 Calls and Puts 10 The Call Option 13 The Long-Term Call Option 20 Investment Standards for Call Buyers 21 How Call Selling Works 22 The Put Option 26 Option Valuation 32 Picking the Right Stock 37 Intrinsic Value and Time Value 38 Chapter 2: The Life of an Option 45 Expiration and Exercise 45 What is "Clearing"? 46 Bid and Ask 47 Order Entry 48 Types of Orders 49 Who Are the Players? 49 Chapter 3: Opening and Tracking: How It All Works 51 Terms of the Option (Standardized Terms) 51 Strike Price 51 Expiration Date 52 Type of Option 53 Underlying Stock 54 A Note on the Expiration Cycle 54 Opening and Closing Option Trades 56 Using the Daily Options Listings 56 Understanding Option Abbreviations 59 Calculating the Rate of Return for Sellers 61 Chapter 4: Buying Calls: Maximizing the Rosy View 65 Understanding the Limited Life of the Call 66 Judging the Call 70 Call Buying Strategies 76 Strategy 1: Calls for Leverage 76 Strategy 2: Limiting Risks 80 Strategy 3: Planning Future Purchases 81 Strategy 4: Insuring Profits 82 Strategy 5: Premium Buying 84 Strategy 6: Pure Speculation 85 Defining Profit Zones 87 Chapter 5: Buying Puts: The Positive Side of Pessimism 93 The Limited Life of the Put 95 Judging the Put 101 Put Buying Strategies 106 Strategy 1: Gaining Leverage 107 Strategy 2: Limiting Risks 109 Strategy 3: Hedging a Long Position 110 Strategy 4: Pure Speculation 114 Defining Profit Zones 115 Chapter 6: Selling Calls: Conservative and Profitable 119 Selling Uncovered Calls 121 Assessing Uncovered Call Writing Risks 126 A Question of Suitability 127 Selling Covered Calls 129 Assessing Covered Call Writing Risks 133 Calculating the Rate of Return 134 Chapter 7: Selling Puts: The Overlooked Strategy 139 Analyzing Stock Value 143 Evaluating Risks 145 Put Strategies 146 Strategy 1: Producing Income 147 Strategy 2: Using Idle Cash 149 Strategy 3: Buying Stock 150 Strategy 4: Writing a Covered Put on Short Stock 153 Strategy 5: Creating a Tax Put 153 Part II: Closing the Position 157 Chapter 8: Closing Positions: Profit, Exercise, or Roll 159 Defining Possible Outcomes of Closing Options 159 Results for the Buyer 160 Results for the Seller 160 Exercising the Option 162 Timing the Decision 168 Avoiding Exercise 171 Chapter 9: Paper Trading: A Test Run of the Theory 183 The Case for Paper Trading 185 Sites Worth Checking 187 www.Optionsxpress.com 187 marketwatch.com 188 www.investopedia.com 188 Proceeding with a Paper Trading Plan 188 The Dangers of Paper Trading 189 Chapter 10: Calculating the Return: A Complex Aspect to Options 193 Finding a Realistic Method 193 Annualizing Models and Guidelines 195 An Overview of Basic Calculations for Calls 198 You Close the Position and Calculate Option-Based Net Return 199 You Close the Position and Calculate Net Return Based on the Entire Position 199 The Covered Call is Exercised, and You Calculate Option and Stock Profits Separately 200 Any Covered Call Outcome Is Computed Strictly Based on Capital on Deposit 200 Anticipating the Likely Return 201 Chapter 11: The Basics of Risk: What Every Trader Needs to Know 205 Volatility as the Definition of Risk 205 Historical Volatility 207 Implied Volatility 210 Pricing Models 213 Risk and Human Nature 215 Confirmation Bias 216 Anchoring 216 Herding 217 Framing 217 Selective Memory 218 Loss Aversion 218 Chapter 12: Strategies in Volatile Markets: Uncertainty as an Advantage 221 Avoiding 10 Common Mistakes 222 Modifying Your Risk Tolerance 228 The Nature of Market Volatility 229 Market Volatility Risk 230 Options in the Volatile Environment 235 Part III: Advanced Strategies 241 Chapter 13: Combinations and Spreads: Creative Risk Management 243 Overview of Advanced Strategies 246 The Spread 246 The Hedge 251 The Straddle 252 The Strangle 253 Vertical Spread Strategies 255 Bull Spreads 256 Bear Spreads 258 Box Spreads 262 Debit and Credit Spreads 265 Horizontal and Diagonal Spread Strategies 265 Altering Spread Patterns 270 Varying the Number of Options 271 Expanding the Ratio 274 Strategies with Moneyness Close to Underlying Prices 277 Variations on the Butterfly 280 Multi-Leg Option Orders 281 In Conclusion 282 Chapter 14: Hedges and Straddles: More Creativity 283 The Two Types of Hedges 283 Hedging Beyond Coverage 286 Hedging Option Positions 288 Partial Coverage Strategies 292 Straddle Strategies 295 Middle Loss Zones 295 Middle Profit Zones 298 Theory and Practice of Combined Techniques 301 In Conclusion 302 Chapter 15: Options for Specialized Trading: Leveraging the Technical Approach 303 Swing Trading Basics 305 The Setup Signal 308 Testing the Theory 311 A Strategic View of Option for Swing Trading 313 Selection of Stocks Based on Value 313 A Stock''s Price Volatility 314 Price History (Recent and Potential) 315 The Price-To-Earnings (P/E) Ratio of the Stock 315 Fundamental and Technical Tests of the Company and Stock 316 Options Used for Other Trading Strategies 316 Swing- and Day-Trading Advanced Strategies 317 Taking Partial Profits 318 Partial Exercise 319 Add More Option Contracts in Times of Price Momentum 319 In Conclusion 320 Chapter 16: Options on Futures: Leveraging Your Leverage 321 Important Distinctions 322 Regulatory Differences 326 In Conclusion 328 Chapter 17: Synthetic Positions: Tracking the Stock 331 Synthetic Put (Protected Short Sale) 333 Synthetic Long Call (Insurance Put, or Married Put) 334 Synthetic Long Stock 336 Synthetic Short Stock 338 Split Strike Strategy (Bullish) 340 Split Strike Strategy (Bearish) 342 Collars 343 Synthetic Straddles 350 In Conclusion 353 Part IV: Risk Evaluation 355 Chapter 18: Risk: Rules of the Game 357 Identifying the Range of Risk 357 Margin and Collateral Risk 360 Personal Goal Risks 360 Risk of Unavailable Market 361 Risk of Disruption in Trading 362 Brokerage Risks 363 Trading Cost Risk 363 Lost Opportunity Risks 364 Tax Consequence Risk 365 Evaluating Your Risk Tolerance 366 In Conclusion 367 Chapter 19: Taxes: The Wild Card of Options Trading 369 Tax Rules for Options 369 Qualified Covered Calls--Special Rules 373 Looking to the Future 378 In Conclusion 379 Chapter 20: Choosing Stocks: Finding the Right Ingredients 381 Developing a Covered Call Action Plan 385 Selecting Stocks for Call Writing 387 Benefiting from Price Appreciation 388 Analyzing Stocks 390 Fundamental Tests 394 Technical Tests 398 Deciding Which Tests to Apply 400 Applying Analysis to Options--the "Greeks" 401 Beta 402 Delta 402 The Rest of the Greeks 404 Acting on Good Information 406 Putting Your.