Trading Options For Dummies. Duarte MD Joe

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      Joe Duarte

      Trading Options For Dummies®, 2nd Edition

       Trading Options For Dummies®, 2nd Edition

      Published by: John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, www.wiley.com

      Copyright © 2015 by John Wiley & Sons, Inc., Hoboken, New Jersey

      Published simultaneously in Canada

      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 permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the Publisher. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.

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      LIMIT OF LIABILITY/DISCLAIMER OF WARRANTY: WHILE THE PUBLISHER AND AUTHOR HAVE USED THEIR BEST EFFORTS IN PREPARING THIS BOOK, THEY MAKE NO REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THE CONTENTS OF THIS BOOK AND SPECIFICALLY DISCLAIM ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. NO WARRANTY MAY BE CREATED OR EXTENDED BY SALES REPRESENTATIVES OR WRITTEN SALES MATERIALS. THE ADVICE AND STRATEGIES CONTAINED HEREIN MAY NOT BE SUITABLE FOR YOUR SITUATION. YOU SHOULD CONSULT WITH A PROFESSIONAL WHERE APPROPRIATE. NEITHER THE PUBLISHER NOR THE AUTHOR SHALL BE LIABLE FOR DAMAGES ARISING HEREFROM.

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      Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com.

      Library of Congress Control Number: 2014954665

      ISBN 978-1-118-98263-1 (pbk); ISBN 978-1-118-98264-8 (ePub); ISBN 978-1-118-98265-5 (PDF)

      Introduction

      Welcome to Trading Options For Dummies, 2nd Edition!

      This book is about introducing you to option strategies for managing risk and navigating a variety of market conditions. It’s geared to managing risk first, with the knowledge that profits will follow. With that in mind, the approaches described focus on reducing potential losses from traditional stock positions and building an option strategy repertoire that allows you to maximize your chances of making sound trades whether the markets are moving up, down, or sideways. To incorporate the comprehensive steps required when trading, it also provides discussions on market and sector analysis, as well as things to look for when trying out a new strategy.

      An option contract is a unique security that comes with contract rights and obligations. When used correctly, an option contract strikes a balance between risk of loss, the amount of money you put at risk, and reward, providing you with leverage while still allowing you to reduce overall trade risk. Of course, there’s another side to that leverage, increased risk, which will be managed, which is the main reason you should take the time to read through this book carefully. You need to understand the risks and characteristics associated with these contracts.

      

When applying for options trading with your broker, the broker will send you the reference guide Characteristics and Risks of Standardized Options. This publication, written by the Options Clearing Corporation (OCC), must be distributed by brokers to their clients prior to allowing them to trade options. It describes option contract specifications, mechanics, and the risks associated with the security. Together, that publication and the one you’re reading right now help you to understand your risks and use options effectively.

About This Book

      There are hundreds of trading titles out there, including those focusing on option strategies. This book focuses primarily on approaches aimed at managing risk – the consistent theme throughout. By setting it up this way, you can read about different topics while keeping that key objective in mind. So go ahead, jump around to areas that interest you most.

      This book can be read from cover to cover or used as a reference guide. Each strategy provided identifies risks and rewards associated with the position. It also identifies alternative strategies to consider for risk management, when applicable. There are a million ways to successfully trade the markets, but certain challenges are universal to all of them. Tools and techniques focused on addressing these challenges are also provided throughout.

      To make reading and understanding the world of options trading a bit easier, we’ve used some conventions to help you along the way:

      ✔ Italics: We provide newly defined terms in italics in all parts and chapters.

      ✔ Acronyms: We try to spell out acronyms quite a bit so you don’t have to flip around a bunch to find out what VIS (very important strategy) stands for – we hate when we have to do that, too.

      ✔ Glossary: You’ll find an online glossary of option trading terms at www.dummies.com/extras/tradingoptions so you can find the definitions that you need fast.

      ✔ Websites: You’ll find references to websites that may provide additional information or make a task easier (like the one in the preceding bullet). And if you ever see a website split from one line to the next, rest assured that we’ve added no extra hyphens, so type the site in your browser just as it appears. If you’re reading the e-book, just tap the link to go to that website.

Foolish Assumptions

      Here’s what we assume about you:

      ✔ You have some experience. We are all dummies, but we are not all beginners. If you’ve chosen this book, you doubtless have some familiarity with the stock market and the risks and rewards it presents to you. As a self-directed investor, you seek ways to manage those risks and rewards. However, if you’re not familiar at all with options or you’ve just had a little exposure to them, don’t worry – option fundamentals and mechanics are covered here and may be a great way to improve your knowledge base. Even if you have traded these instruments before, you can consider this a review if you’re looking for one.

      ✔ You’ve read investing books before and you will read this section carefully at some point in order to avoid pitfalls and misunderstandings as you go through this book.

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