James Cordier - The Complete Guide to Option Selling

How Selling Options Can Lead to Stellar Returns in Bull and Bear Markets

Second Edition

JAMES CORDIER
MICHAEL GROSS

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PART I
SELLING OPTIONSWHY AND HOW IT WORKS

Chapter 1
Why Sell Options

Chapter 2
A Crash Course on Futures

Chapter 3
Buying Options versus Selling Options

Chapter 4
SPAN Margin: The Key to High Returns

PART II
OPTION SELLING STRATEGY AND RISK CONTROL

Chapter 5
Strike Price and Time Selection

Chapter 6
Use and Abuse of Spreads

Chapter 7
Recommended Spread Strategies

Chapter 8
Liquidity, Order Placement, Assignment, and Limit Moves

Chapter 9
Risk Control in Option Selling

PART III
MARKET ANALYSIS AND OPTION SELLING

Chapter 10
Fundamentals versus Technicals

Chapter 11
Key Fundamentals of Select Markets

Chapter 12
Seasonal Analysis and Option Selling

Chapter 13
The Best Markets for Seasonal Option Sales

Chapter 14
Volatility Simplified

Chapter 15
Structuring Your Option Selling Portfolio

PART IV
GETTING STARTED

Chapter 16
Mistakes New Option Sellers Make

Chapter 17
Finding a Good Broker or Money Manager

Chapter 18
Option Selling as an Investment

Chapter 19
Pulling It All Together

Have you ever heard it said that the vast majority of options expire worthless? It is estimated that anywhere from 75 to 80 percent of all options held through expiration will indeed expire worthless. Furthermore, it is estimated that only 10 percent or less of all options will ever be exercised. This being the case, why arent more investors taking advantage of this phenomenal statistic? Why is the average sit-at-home investor not analyzing endless lists of strike prices seeking the most glowing opportunities for deterioration instead of reviewing mutual fund performance tables or stock price-earnings (P/E) ratios? Why are the majority of futures traders losing money year after year, trying to pick the perfect top or bottom by buying or selling a futures contract or, worse yet, buying an out-of-the-money put or call that has a remote chance of ever showing any kind of profit, let alone a windfall?

The answer is the old trading axiom: Fear and greed fear of risk, fear of the unknown, and most important, fear of that which is not understood. Most brokers or investment advisors, when asked about the strategy of option selling, will give a response such as, You want to stay away from that. Its too risky. Yet, when asked to explain the approach in detail, few can do a thorough job. If the investment representatives from the industry cannot explain a particular approach to investing, how can the overall community of investors be expected to understand the approach? Option selling has unlimited risk is all that most investors know about the concept. The term unlimited risk is enough to cause most investors to cross it off their list of potential investment strategies without further exploration.

What about greed? The other knock on option selling is that it is slow. It is boring. It has limited profit potential. It goes against most investors instincts to take an unlimited risk for the potential for a limited profit. Most traders, especially futures traders, have been taught from their first trading lesson that in order to turn a profit, a series of small losses must be accepted to make that one big gain. It is the potential for this one big gain that keeps traders and gamblers alike coming back time after time and losing money time after time. Taking many losses in order to make one big gain is very difficult, even for the most experienced investor. Why? Because it goes against human nature. Humans are cursed with the emotion of hope when involved in an investment situation. We hope our losses will turn around for us and look for excuses to stay in our position for one more day. Yet, when faced with a winning trade, the anxiety of remaining in the position is almost unbearable.