No-Hype Options Trading Myths, Realities, and Strategies That Really Work

by Given, Kerry W.

• ISBN13: 9780470920152
• ISBN10: 0470920157
• Edition: 1st
• Format: Hardcover
• Copyright: 2011-01-11
• Publisher: Wiley

Summary

A straightforward guide to successfully trading optionsOptions provide traders and investors with a wide range of strategies to lock in profits, reduce risk, generate income, or speculate on market direction. However, they are complex instruments and can be difficult to master if misunderstood.No-Hype Options Trading offers the straight truth on how to trade the options market. In it, author Kerry Given provides realistic strategies to consistently generate income every month, while debunking many myths about options trading that tend to lead retail traders astray. Along the way, he makes a conscious effort to avoid complex strategies that are appropriate only for market makers or professional traders, and instead focuses on low-risk strategies that can be easily implemented and managed by a part-time trader. Shows how you can use option spreads in conjunction with stocks to produce a regular stream of income Each chapter includes exercises to help you master the material presented Examines how you can adjust option positions as market conditions change in order to maintain an optimal risk/reward profileWritten for anyone interested in successfully trading options, this reliable resource cuts through the hype and misinformation that surrounds options trading and presents a realistic path to profits.

Author Biography

KERRY W.GIVEN, PhD, is founder of Parkwood Capital, LLC, a business that consists of stock and options coaching, a monthly newsletter, a small hedge fund, and a trading advisory service. He writes a monthly column, "Ask Dr. Duke," for, and conducts monthly webinars with, SFO magazine. Given speaks frequently at trading conferences and on behalf of various option brokerage firms. He is the only options coach and educator who publishes his trading results live as they occur. Given earned his BS from the University of Florida and his PhD from the University of Minnesota.

Table of Contents

Acknowledgments	p. xi
Introduction	p. xiii
The Foundations of Options Trading	p. 1
Option Basics	p. 3
Definitions of Calls and Puts	p. 3
Are You Long or Short?	p. 4
Option Contract Size	p. 4
Is My Option In- or Out-of-the-Money?	p. 5
Option Trade Orders	p. 5
Option Expiration	p. 6
LEAPS Options	p. 7
Option Settlement	p. 7
Options Cycles	p. 8
Probability Distributions	p. 11
The Gaussian Distribution	p. 11
Application to the Real World	p. 12
Risk-Adjusted Returns	p. 15
High-Probability Trading	p. 17
Low-Probability Trading	p. 18
Options Trading Myths	p. 20
What Is a Conservative Trade?	p. 21
Exercises	p. 22
Options Pricing and Implied Volatility	p. 25
The Black Scholes Pricing Model	p. 25
The Greeks	p. 26
Implied Volatility	p. 27
Building the Price of an Option	p. 28
A Closer Look at the Greeks	p. 29
How Will We Use the Greeks?	p. 31
Exercises	p. 32
Vertical Spreads	p. 33
Building the Vertical Spread	p. 33
Effects of Implied Volatility	p. 35
Early Exercise	p. 41
Expiration and Exercise	p. 43
Margin Requirements	p. 44
Application of Probability Calculations	p. 45
Risk/Reward and Probability of Success	p. 46
Exercises	p. 47
Options Strategies for Income Generation	p. 49
Using Options to Boost Income in a Stock Portfolio	p. 51
The Classic Covered Call Strategy	p. 52
Strategic Considerations	p. 53
The Notorious Selling Naked Puts Strategy	p. 53
Selling Naked Puts for Income	p. 54
Buying Stocks at a Discount	p. 56
Combining the Covered Call with Selling Naked Puts	p. 56
Early Exercise	p. 58
Risk Management	p. 60
The Achilles' Heel of Directional Strategies	p. 61
Exercises	p. 62
Calendar and Double Calendar Spreads	p. 63
Vega Risk and Calendar Spreads	p. 66
Volatility Skews	p. 67
Searching for Calendar Candidates	p. 70
Entering and Managing the Trade	p. 71
Early Exercise	p. 71
Adjustments	p. 72
Out-of-the-Money Calendar Spreads	p. 73
Double Calendar Spreads	p. 73
Determining the Optimal Strike Prices	p. 76
Trade Management and Adjustments	p. 82
Multiple Calendar Spread Positions	p. 83
Exercises	p. 83
Double Diagonal Spreads	p. 85
Diagonal Spreads	p. 85
Double Diagonal Spreads	p. 87
Managing the Trade	p. 90
Double Diagonals vs. Double Calendars	p. 91
Exercises	p. 92
Butterfly Spreads	p. 95
At-the Money and Out-of-the-Money Butterfly Spreads	p. 95
Iron Butterfly Spreads	p. 99
The Broken-Wing Butterfly	p. 99
Margin Requirements	p. 101
Trade Management	p. 103
Closing Butterfly Spreads	p. 106
Butterfly Spreads as Adjustments	p. 111
Exercises	p. 112
Condor Spreads	p. 113
The Basic Condor Spread	p. 113
The Opportunistic Model	p. 116
The Insurance Model	p. 119
Iron Condor Spreads	p. 121
Vega Risk and the Condor	p. 124
The Short-Term Iron Condor	p. 128
The Long-Term Iron Condor	p. 129
Capital Management	p. 131
Risk Management	p. 131
Adjustment Techniques	p. 132
Adjustment Pros and Cons	p. 134
Adjustment Case Studies	p. 135
Managing the Iron Condor with the Greeks	p. 138
Advanced Adjustment Techniques	p. 140
Iron Condor Trading Systems	p. 140
Butterflies and Condors Are Cousins	p. 144
Exercises	p. 146
Delta-Neutral Trading Strategies	p. 149
Risk Management Systems	p. 151
Challenging Markets for the Delta-Neutral Trader	p. 152
Two Distinct Trading Philosophies	p. 153
The "Secret" of Success	p. 155
Make Your Trading a Business	p. 157
Getting Started	p. 157
Managing Losses	p. 159
The Trading Plan	p. 159
Money Management	p. 160
The Psychology of Trading	p. 161
Living with the Two-Headed Monster	p. 163
Required Tools for This Business	p. 164
What's Next?	p. 165
Appendix: Answers to the Chapter Exercises	p. 169
Glossary	p. 185
Index	p. 193
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