Michael C. Thomsett - AARP Getting Started in Options

Maybe youre thinking its time to review your investment strategy and make the most of the money you have today. Maybe youve already built a financially successful retirement egg and want to protect what youve built. Or maybe you need to bulk up your earnings to ensure your familys future.

Dedicated to helping you protect your assets, stretch your dollars, and bolster your longterm security, AARP can offer you powerful solutions. Whatever your strategy for managing money, weve got suggestions that will help from saving money on that next big purchase to planning your charitable giving. If youre taking your job to the next level or building up a second career, weve got strategies that will help you make your mark.

You may think your money or your financial advisor should be working harder for you. You may be watching market trends and seeing new opportunities. And, of course, you want to protect yourself and your loved ones from scams and data breaches. We can give you the support you need.

And turn to us for fun, too. (Is it time for that car, that trip, that weekend home youve always wanted?) Because that, too, is what this time of your life is about.

AARP is a nonprofit, nonpartisan membership organization that helps people
50 and older improve their lives. For more than 50 years, AARP has been serving
our members and society by creating positive social change. AARPs mission
is to enhance the quality of life for all as we age; lead positive social change;
and deliver value to members through information, service and advocacy. This
information in this book is for educational purposes and does not constitute
financial advice.

Table of Contents

Acknowledgments

Thanks to those many readers who wrote to offer their suggestions and insights to 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.

A very special thanks goes 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, thanks go to Candlestickchart.com for their generous permission to use their charts to illustrate many points in this book; and to the RediNews Network, which provided the market data used in those charts.

Finally, I am grateful to my wife, Linda Rose Thomsett, for her insights, support, and enthusiasm for this project.

Element Key

Examples: Numerous examples illustrate points raised in the discussion surrounding them, and are designed to express those ideas in practical applications of the principles.

Definitions: This symbol is found in boxed notations providing specific definitions of options terms. These occur at the point of discussion within the book, making definitions applicable to the section being read. (All definitions are also summarized for you in the glossary.)

Smart Investor Tips: These are useful observations, rules of thumb, resources, and other added points every options trader can use.

Introduction to the 8th Edition

The options market has had a remarkable history since its inception in 1973. Every year, new records are set that vastly pass up previous record levels. This trend is going to continue into the future, because option trading makes sense on so many levels and for so many reasons.

In 1989, the year the first edition of Getting Started in Options was published, only 227 million options contracts traded during the entire year. In 2008, for the first time, total trading volume exceeded three billion contracts. That is considerable growth in only 20 years.

In the first year that listed options were traded (1973), only 1.1 million contracts traded. In those days of pre-Internet, pre-electronic trading, that was a lot of volume. However, the Internet has made the entire options market faster and more efficient and, most important, accessible to anyone with a computer.

In 2000, the Options Clearing Corporation (OCC) reduced its clearing fees by a record 41 percent, making options trading practical at bargain levels for the first time. Trading since then has grown at an amazing rate. In 1999, volume passed one-half billion contracts for the first time. Volume then moved over one billion in 2004 and over two billion in 2006. Even with the volatile and fast-changing market of 2008, the popularityand for many, the necessityof options continued to grow. In 2008, volume of contracts traded passed the three billion mark for the first time.

Why are options so popular and why is this popularity expanding? The answer involves several aspects:

1. The Internet has made options accessible to everyone. In the past, you had to telephone or visit a stockbroker, who had to then place a call to an exchange to get a quote and place an order. This cumbersome process meant that anyone who was not physically on the exchange floor missed many fleeting opportunities.

2. Costs have been vastly reduced. Since 2000, when clearing fees were reduced 41 percent, the cost of trading options is quite low. If you use an online discount broker, you can buy or sell contracts for about $10. That is a real bargain.

3. The use of options goes far beyond speculation. Many people think of options as high-risk and purely speculative instruments in which it is easier to lose than to win. However, many strategies are undertaken to hedge stock positions, insure paper profits, and take profits without having to sell stock. The many uses of options make them not only a valuable tool, but an essential tool in the modern portfolio. The flexibility of options is increasingly making them a vital strategy for portfolio management and risk reduction.

4. Expanded products have made options useful in many ways beyond options on shares of stock. Today, you can buy long-term options or options on futures, exchange-traded funds, indices, and even futures contracts. Options trading is also available internationally today, and many foreign exchanges and fully automated exchanges provide options trading. In other words, the universe of options trading has become quite mainstream.

5. Education has expanded along with ease of access through the Internet. The Chicago Board Options Exchange (CBOE) offers many online and live educational seminars on options trading; seminars, online courses and tutorials, articles, and books are easily found; and more and more stock investors are beginning to recognize the value of options as part of their portfolios.