A comprehensive guide that lets you play the options game with confidence Due to the uncontrollable elements associated with options, many traders find themselves without practical strategies for specific situations. The Option Trader's Guide to Probability, Volatility, and Timing offers traders a variety of strategies to trade options intelligently and confidently in any given situation.
With detail and objectivity, this book sets forth risk assessment guidelines, explains risk curve analysis, discusses exit methods, and uncovers some of the biggest mistakes options traders make. The Option Trader's Guide provides readers with strategies for trading options as well as expert advice on when to implement those strategies. Help Centre. Track My Order. My Wishlist Sign In Join. Be the first to write a review.
Sorry, the book that you are looking for is not available right now. Description Table of Contents Product Details Click on the cover image above to read some pages of this book! The Basics of Options.
The option trader's guide to probability, volatility, and timing /Jay Kaeppel. – National Library
Reasons to Trade Options. Option Pricing. Time Decay.
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Market Timing. In other words, options are no longer optional. Options have become so critical to investment management that many money managers think you cannot run an investment portfolio without using puts and calls. Options dealers — these are the specialized traders who make markets — have for a long time, been some of the largest stock traders in the nation. Every time puts and calls traded, options dealers traded stocks to manage the risk. In fact, derivatives trading is now more lucrative for exchanges than stock trading. Yet, the options market remains wildly misunderstood, and that is understandable.
The financial press corps loves any story that involves people either making a load of money in a short time, or better yet losing a ton of money in an even shorter time. A story about investors using options to increase returns and reduce risk is not nearly as exciting as one about investors who lost money trading complicated options strategies or betting that the CBOE Volatility Index, or VIX, will surge and stocks will decline.
Besides, many investors have dabbled in options and lost money. This was especially true before when the options traded in open-outcry trading pits and prices were controlled by dealers who shouted a lot and wore funny colored jackets. But since , exchanges have shifted options to sophisticated, electronic trading systems that have dramatically improved prices and liquidity.
There is still risk inherent in options, but there is also risk in driving a car, crossing the street or eating too much red meat and not getting enough exercise. But there is a secret to options trading that is well known to institutional investors, including mutual fund managers.
Instead, we are interested in using options to try to perpetually hit proverbial singles and doubles, to borrow a baseball phrase. The goal is to increase the returns of owning stocks without sharply increasing risk, while never doing anything that causes you to lose so much money that you get knocked out of the markets. Even if you decide that options are not for you, it is important to understand options. The options market influences the price of every stock, index and exchange-traded fund.
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The options market is the place where the most sophisticated investors come to reveal their thoughts about what may happen in the stock market. They do this by trading bearish puts and bullish calls to express investment views about the future directions of stocks.
The volume of options trading is so large on any given day that it requires dealers to trade massive amounts of stocks and futures. Anyone who uses that knowledge to trade options often more successfully invests in stocks. In fairness, the options market scares a lot of people, and the world of puts and calls often suffers from a bad reputation. Some investors have been lured into the options market by charlatans who told them that they could use options to make a lot of money in a short time.
In truth, the only people who ever seem to make a lot of money in a short time are the hucksters selling snake oil to investors who want to believe what they hear.
These hucksters make their money selling so-called trading secrets that usually turn out to be sheer nonsense. Options trading is as much a discipline , and way of thinking, as it is a way of trading. The market is animated by a philosophy that values risk over reward, probability over possibility, and a sense that the market mob is often wrong but never in doubt.
Good options traders tend to make great stock investors. By learning to think about probabilities, risk and volatility, investors tend to think more clearly about stocks. By the time you are done reading our options primer, you will know how you can use options to buy stocks for less than they are trading, how to sell stocks for more than they are trading, and how to get paid just for agreeing to buy and sell stocks.
This may seem very elementary, but even the most sophisticated investors spend time defining terms with each other. They do this because the language of investing is not uniform, especially at higher levels. Different terms mean different things to different people.
TRADE TRACK RECORD
Options give investors the right to buy and sell stocks at predetermined prices within set times. Options are contracts with standardized terms. Those paper contracts specified the name of the company, the expiration date of the contract, and the strike price. The terminology continues to exist even though options contracts are now electronically traded. When investors want to buy stocks, they buy calls, which increase in value as stock prices rise.
When investors are worried that stocks will decline, they buy puts, which increase in value when stock prices decline. All puts and calls have strike prices. The strike price references the value of the underlying, or associated, stock. Read my bio. All options contracts have expiration dates. After a certain period of time, the options contract expires and no longer has any value. Options have an expiration cycle. The expiration cycles range from one week to about two years.
Investors can buy or sell options that expire in one week out to two years. Most trading, however, is centered on options that expire in three-months or less.
The interest in shorter expirations reflects how closely institutional investors — think mutual funds and hedge funds and pension funds — are focused on corporate earnings reports and their own quarterly performance. The shorter-dated options also have the most liquidity. Puts and calls are the building blocks of the options market, and the foundation of a series of trading strategies that anyone can use to try to bend the chaos of the stock market to their investment objectives.
See How I’ve Crushed The S&P500 By 222%
It is a cold fact that options are not suitable for everyone. Investors should first have experience investing in stocks before venturing into the options market. After all, options derive their value from the underlying stocks. Options require more care and study than just buying stocks. With stocks, investors can simply buy and hold, and hope that time redeems their decision.
Some investors use options to hedge stocks or to speculate on price movements.
Others use options to enhance yields and to generate income. Some investors use options for more aggressive purposes, but the truth is that the most successful investors tend to shy away from using options for speculative purposes like wagering on takeovers, or price movements in stocks. The vast majority of what occurs in the options market on a daily basis is simple, basic portfolio management strategies that are frankly rather boring.