Michael Sincere - Understanding Options

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To my mother, Lois, whom I will always remember for her compassion and generosity, who asked for so little while accomplishing so much; and to my father, Charles, for his kindness and positive attitude.

To Anna Ridolfo, a close friend and loyal New Yorker, who devoted her life to helping others.

Contents

Preface

A Much Improved Options Book

Because of the success of the first edition of Understanding Options , my editor at McGraw-Hill asked me to write a second edition. I want to thank the thousands of readers who bought my book and wrote to me with suggestions. Because of their ideas, this second edition is even better.

I listened to the readers who wrote and said they wanted to learn more about intermediate and advanced strategies. In this edition, I added chapters on exercise and assignment, collars, writing cash-secured puts, buying straddles and strangles, the Greeks, implied volatility, protective puts, and spreads. I also included advanced strategies such as iron condors, calendar spreads, the butterfly spread, and trading options on exchange-traded funds (ETFs).

Finally, I discuss popular products such as weekly options and mini-option contracts. Obviously, the second edition is a lot longer. Still, I did my best to introduce all the strategies using understandable language.

If you are learning about options but are not familiar with the stock market, I suggest you read my book Understanding Stocks (McGraw-Hill, 2nd Edition). That should help answer most of your questions, and its written in the same reader-friendly voice as this book.

Finally, while you are reading this book, if you have any questions about options, I include a toll-free phone number that you can call Monday through Friday. It may be hard to believe but all your options questions will be answered by calling this number. You can also chat online with an options professional. The cost? Free.

Who Should Read This Book

If you are thinking of trading stock options or you are already trading them but losing money, this could be the most useful book you ever read. I have taken the classes, read the books, talked to the pros, and made the trades, so I can teach you what I learned. Like my other books, I try to explain options as if you were sitting across from me at the kitchen table. My goal is to save you time and money while educating and entertaining you.

An options book that is entertaining? I know it sounds ridiculous, especially if you have slogged through the dozens of other options books that are supposedly for beginners. Most of the option books I have read sound as though they were written for lawyers or mathematicians. They make options seem a lot more confusing than they actually are. Perhaps its because option contracts are legal contracts that include specialized terms. As much as possible, I leave most of the lawyerly talk out of the book.

I have one friend who is afraid to take risks and another one who is a speculator. When I told my timid friend that he should consider trading options, he immediately snapped, Are you crazy? Thats way too complicated for me! I dont want to lose all my money. He was an experienced stock market investor who liked to buy and hold stocks and index funds. He believes that options are a get-rich-quick scheme that operates like a casino. He was convinced that options were not friendly to risk-averse investors.

My speculator friend, a successful dentist, is addicted to the Vegas-style action of the stock market. When the stock market wasnt exciting enough, he and his wife enrolled in an options seminar, plunking down $4,000 for the two-day course (not including the $2,000 software that supposedly chose winning options). The instructor pressed all the right buttons, and by the end of the class my friend was ready to plunge into options using sexy strategies like naked puts, calendar spreads, and straddles. He was convinced that he could quickly make a fortune in options by using the most sophisticated strategies. He believed that the more complicated the strategy, the more money hed make. Fortunately, he talked to me first.

I wrote this book for my two friends and thousands more like them. If you think that options are too complicated or dangerous, give me a chance to change your mind. The good news: there is an options strategy that will meet the needs of both of my friends, from the risk-averse defensive investor to the risk-loving speculator. In addition, if you are reading this book not to make money, but for education or entertainment, I believe the book will meet your needs.