Ann Logue - Idiot’s Guides: Options Trading

No one likes a know-it-all. Most of us realize theres no such thinghow could there be? The world is far too complicated for someone to understand everything there is to know. So when you come across a know-it-all, you smile to yourself as they ramble on because you know better.

You understand that the quest for knowledge is a never-ending one, and youre okay with that. You have no desire to know everything, just the next thing. You know what you dont know, youre confident enough to admit it, and youre motivated to do something about it.

At Idiots Guides, we, too, know what we dont know, and we make it our business to find out. We find really smart people who are experts in their fields and then we roll up our sleeves and get to work, asking lots of questions and thinking long and hard about how best to pass along their knowledge to you in the easiest, most-accessible way possible.

After all, thats our promiseto make whatever you want to learn As Easy as It Gets. That means giving you a well-organized design that seamlessly and effortlessly guides you from page to page, topic to topic. It means controlling the pace youre asked to absorb new informationnot too much at once but just what you need to know right now. It means giving you a clear progression from easy to more difficult. It means giving you more instructional steps wherever necessary to really explain the details. And it means giving you fewer words and more illustrations wherever its better to show rather than tell.

So here you are, at the start of something new. The next chapter in your quest. It can be an intimidating place to be, but youve been here before and so have we. Clear your mind and turn the page. By the end of this book, you wont be a know-it-all, but your world will be a little less complicated than it was before. And well be sure your journey is as easy as it gets.

Mike Sanders
Publisher, Idiots Guides

Publisher: Mike Sanders

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First American Edition, 2016
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Contents

Introduction

Options are powerful tools for managing financial assets. They can be used to manage risk, generate income, and make money. Theyre also complicated. Lets get that upfront. As a result, too many investors shy away from options because they confuse complication with risk. Others are led astray by advisers who take advantage of the complication to recommend high-commission, low-return strategies. Its unfortunate, but it happens.

Because options are complicated, though, they are an ideal topic for a book like this. Here, I break down the terminology and function of options to help you understand how you can use them to manage risk and to make money.

An option is a contract that gives you the right to buy or sell something at a predetermined price on a predetermined future date. You are not obligated to exercise the contract, so you wont unless it is to your advantage to do so. Most options are not exercised.

It sounds like a goofy thing, doesnt it? It sounds like something thats not quite real, not quite practical, and possibly sketchy, doesnt it? Perhaps it sounds like something thats used by financial people just to confuse the rest of us. However, options have real value.

Suppose you think about an option in another way: as insurance. Your car insurance policy gives you the right, but not the obligation, to file an accident claim up to the amount of value of the car while the policy is in force. You dont have to file a claim, and it might not be worth your while to even file it if you do have a minor accident that will cost less to repair than to cover your deductible. And yet, that policy has real value to you even if it expires unused.

An option is a form of insurance. It is written on the value of an underlying asset, such as a share of stock, a market index, or a foreign currency. Some people buy options to insure against an unfavorable price change.

Some people sell options to bet that the price change wont be favorable. They are not bad people. Instead, they are providing the insurance. In a same way, your car insurance company is betting that you wont get into an accident so that it can keep the premiums you pay each month.