Thomsett - Getting Started in Options, Illustrated Edition

GETTING STARTED IN
OPTIONS
ILLUSTRATED EDITION

Copyright 2013 by Michael C. Thomsett.

Published by John Wiley & Sons Singapore Pte. Ltd.
1 Fusionopolis Walk, #07-01, Solaris South Tower, Singapore 138628

All rights reserved.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as expressly permitted by law, without either the prior written permission of the Publisher, or authorization through payment of the appropriate photocopy fee to the Copyright Clearance Center. Requests for permission should be addressed to the Publisher, John Wiley & Sons Singapore Pte. Ltd., 1 Fusionopolis Walk, #07-01, Solaris South Tower, Singapore 138628, tel: 6566438000, fax: 6566438008, e-mail: .

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ISBN 978-1-118-39930-9 (Paperback)
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ISBN 978-1-118-39932-3 (Mobi)
ISBN 978-1-118-39931-6 (ePub)

ACKNOWLEDGMENTS

Thanks to those many readers who wrote to offer their suggestions for and insights into previous editions of this book, including constructive criticism and clarifying questions. Their letters have helped to improve the ever-changing sets of explanations and examples, definitions, and other materials used in this book.

Very special thanks go to Debra Englander, my editor for many years at John Wiley & Sons, whose encouragement through many editions of this and other books has been greatly appreciated.

Also, many thanks to Nick Wallwork and Gemma Rosey, my editors in Singapore, for their excellent help and guidance through the production process.

ELEMENT KEY

Definitions This symbol is found in boxed notations providing specific definitions of options terms. These are placed within the book to accompany and augment discussions relevant to each definition

Key Points These highlighted sections emphasize key points or add observations, rules of thumb, resources, and added points that options traders can use.

Valuable Resources These sections provide links to websites where you will find added value for particular options discussions, to further help in expanding your options knowledge base.

Examples Numerous examples illustrate points raised in context and provide a view of how the issues might apply using actual options trades. This is intended to demonstrate practical application of the principles being presented.

INTRODUCTION

This edition is a departure from past evolution. In the past, editions were simply updated as new information evolved in the ever-changing options market. This new, illustrated edition contains many new elements and features not found in previous ones.

When the first edition of this book was published in 1989, the options market was very young and new. During that year, only 227 million contracts traded. Today, annual trading exceeds 4 billion contracts.

In the early days of this market, there was no Internet or affordable online order execution. The Internet has drastically changed all markets, including options, and has made them accessible to anyone with a PC or hand-held device. To give you an idea of how much matters have improved, today the clearing fees charged by the Options Clearing Corporation (OCC) are less than half of what they were before the year 2000.

The popularity of options trading is due to many factors. The market has grown up over the past two-plus decades. The investing and trading public consists of a broad range of people. Speculators are only a part of the overall options market today, expanding the importance of the options market into many areas beyond high-risk. Options may be either high-risk or extremely conservative, and can be used for portfolio management. This means that risks can be reduced and even eliminated with a carefully structured series of strategies aimed at offsetting downside risk.

The combination of Internet access and lower costs has combined to bring options to anyone and everyone who wants to find out how to use calls and puts as strategic tools. Product types have expanded throughout the period as well and today options are available not only on listed stocks, but also on indexes, exchange-traded funds (ETFs), and futures. Education has expanded as well. As options have become appealing to a wider range of investors and traders, industry experts and organizations like the OCC and the Chicago Board Options Exchange (CBOE) have vastly expanded their educational outreach.

This illustrated edition is designed with many new features. The book includes numerous examples, definitions in context, key points, website links, checklists, illustrations, and tables.

Anyone using this book to learn about options may appreciate that it includes some repetition. This is a device intended to help you to overcome the inherent complexity of options trading. The jargon is confusing at first, so it takes time to become accustomed to the new language of options. Making it even more difficult to quickly move into the market, the range of possible strategies is vast and this makes it important to take time to learn about options in steps.

Some suggestions for anyone new to this field:

• Master the terminology. Focus on the many specialized option terms and get accustomed to seeing them in the context of examples and strategies.
• Remember the context of risk. All investing and trading decisions are wisely made with an appreciation of the risk levels involved. Only by remembering risk can you know whether a strategy is appropriate for you.
• Track both options and stocks on the market. Options traders need to observe how options change in value in relation to how stocks move in price, especially when markets are volatile. You will discover that options do not track stock price changes exactly; there are many factors influencing how options pricing changes.