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Options Trading for the Conservative Investor: Increasing Profits Without Increasing Your Risk

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Options Trading for the Conservative Investor: Increasing Profits Without Increasing Your Risk

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Description

  • Copyright 2005
  • Pages: 288
  • Edition: 1st
  • eBook (Watermarked)
  • ISBN-10: 0-13-204486-2
  • ISBN-13: 978-0-13-204486-8

If you're an investor concerned with preserving capital, maximizing predictability, and maintaining consistently strong returns, your best solution just might surprise you: Options. In Options Trading for the Conservative Investor, Michael C. Thomsett reveals a narrow band of options strategies that can help you improve results as you systematically reduce unnecessary risk throughout your portfolio.

Thomsett, author of the global best-seller Getting Started in Options, writes in simple, nontechnical language, uses real examples, and guides you through every strategy–one easy step at a time. He's made this book simple and visual enough for any experienced investor to use, even if they have no experience trading options.

Thomsett systematically covers several options strategies optimized for conservative investors, including covered call writing on carefully selected stocks, contingent purchase strategies, and powerful "combination" strategies that produce cash to bolster current income. No matter how cautious an investor you are, this book will give you powerful new tools for achieving your financial goals–without losing a moment of sleep.

Sample Content

Table of Contents

Preface.

Acknowledgments.

About the Author.

1. Setting the Ground Rules.

    The Ground Rules

    A Model Portfolio

2. Option Basics.

    The Workings of Option Contracts

      Option Attributes to Determine Value

      Intrinsic and Time Value Premium

      Long-Term Options and Their Advantages

      Strike Price of Options

      The Time Advantage for Short Sellers

    Long and Short

      Taking Profits Without Selling Stock

      Buyer and Seller Positions Compared

      Understanding Short Seller Risks

    Calls and Call Strategies

      Is the Strategy Appropriate?

      Option Terms and Their Meaning

      The Cost of Trading

      In, At, or Out of the Money

    Puts and Put Strategies

      The Overlooked Value of Puts

      The Insurance Cost of Puts

      Conservative Guidelines: Selling Puts

      Puts as a Form of Contingent Purchase

    Listed Options and LEAPS Options

      Using Long Calls in Volatile Markets

      Using LEAPS Puts in a Covered Capacity

    Coordinating Strategies with Portfolio Goals

    Option and Stock Volatility: The Central Element of Risk

      Critical Analysis of Volatility

      Free 20-Minute Delayed Quotes

      The Black-Scholes Model

      Identifying Your Market Opportunities

      Limiting Your Strategies to Conservative Plays

      Identifying Quality of Earnings

    Trading Costs in the Option Analysis

      Calculating the Net Profit or Loss

    Tax Rules for Options: An Overview

    The Importance of Professional Advice and Tax Planning

3. Options in Context.

    The Nature of Risk and Reward

      Using Volatility as the Primary Risk Measurement

      Options Used to Mitigate Stock Investment Risk

      Another Kind of Volatility

      Lost Opportunity Risk and Options

    Perceptions About Options

      Finding the Conservative Context for Options Trading

      Strategic Timing and Short-Term Price Changes

    Short Positions, Naked or Covered

      The Uncovered Call-A Violation of the Conservative Theme, Usually

      A Stock's Likely Lowest Theoretical Price Level

      Short Put Risks-Not as Drastic as Short Call Risks

    Margin Requirements and Trading Restrictions

      Other Margin Rules

    Return Calculations-Seeking Valid Comparisons

      Return If Exercised

      Return If Expired

    Long-Term Goals as a Guiding Force

    Exercise as a Desirable Outcome

4. Managing Profits and Losses.

    Your Conservative Dilemma

      Deciding How to Establish Your Policies

    Managing Profits with Options

      Basing Decisions on the Fundamentals

      The Reality of Risk

    Overcoming the Profit-Taking Problem

      Realizing Profits Without Selling Stock

      Further Defining Your Personal Investing Standards

      When a Rescue Strategy Is Appropriate

      Reverting to a Secondary Strategy

    Managing the Inertia Problem

      Inertia Management

    Taxes and Profits

      Options Used for Riding Out Volatility

5. Options as Cash Generators.

    The Covered Call Concept

      Who Makes the Decision?

    Examples: Ten Stocks and Covered Calls

      Working within Pre-Established Standards

      Calculating the Gain Comparatively

    Smart Conservative Ground Rules

    A Conservative Approach

    Tax Ramifications of Covered Calls

      Six Levels of Separation (of Your Money) for Taxes

    Rolling Forward and Up-Exercise Avoidance

      The Types of Rolls

    The Exercise Acceptance Strategy

      Remembering to Limit Yourself to Conservative Strategies

6. Alternatives to Stock Purchase.

    Leverage and Options

      Applications of Contingent-Purchase Strategies

    The Long-Call Contingent-Purchase Strategy

      Diversifying Exposure with Several Stocks in Play

      Reducing Contingent Purchase Risks

    The Covered Long Call

      Extrapolating Future Strike Prices

      Using the Forward Roll Effectively

    Short Puts and Contingent Purchase

      The Value of Selling Puts

      The Value of Shorter Exposure Terms

    Rescue Strategy Using Calls

      Rescue Strategy Based on Smart Stock Choices

      Programming a Profitable Result

      The Ratio Write-Before Adjusting to Make It Conservative

      Converting the Ratio Write into a Conservative Strategy

      Ratio Writes for Rescue Strategies and Higher Current Returns

    Rescue Strategy Using Puts

      The Risk of Continued Price Declines

    Covered Calls for Contingent Sale

      Picking the Right Conditions for Forced Exercise

7. Option Strategies in Down Markets.

    Thinking Outside the Market Box

      Remembering the Fundamentals

      Conservative Versus Speculative: Remembering the Difference

    The Long Put: The Overlooked Option

      When the Stock's Price Rises

      When the Stock's Price Falls

    Short Puts: A Variety of Strategies

      Conservative Ground Rules for Short Puts

      Comparing Rates of Return for Dissimilar Strike Prices

      Three Types of Rescue Strategies

    Using Calls in Down Markets

      Calls Used for Leverage, but Not for Speculation

    Evaluating Your Stock Positions

      Rescue Strategies and Opportunity

      Examining the Causes of Price Volatility

      Deciding When to Sell and Replace Stock

    Stock Positions and Risk Evaluation

      The Relationship Between Stock Safety and Options

      Examining Your Risk Profile

    Options and Downside Risk

      The Down-Market Benefits of Options

    Option Planning with Loss Carryover

      Timing: Matching Current-Year Profits and Losses

8. Combination Conservative Techniques.

    Spread Techniques

      Advanced Spread Terminology

    Straddle Techniques

      Short Straddles for Conservative Positions and High Rates of Return

    Long or Short Positions

      Mixing the Long and the Short

    Theory Versus Practice

      Simplicity as a Worthy Goal

      Worst-Case Outcome as a Desirable Result

    Tax Problems with Combination Strategies

      The Anti-Straddle Rule and Its Effect

    The Ultimate High-Return Strategy

      A Review of Your Conservative Assumptions

    Examples of the Strategy in Practice

      Pick Your Portfolio

      Pick Expiration Dates

      Review Trading Range Trends

      Look for Available Options and Strike Prices

      Compare Yields 

      Select Stocks for the Short Combination Strategy

    Outcome Scenarios

      Planning Ahead for Each Outcome Scenario

    The Augmented Strategy-A Short Straddle

      How the Dollar Values Alone Can Mislead

      Maximum Advantage: Large-Point Discounts

    Rescue Strategies

      Three Valuable Rescue Strategies

9. Stock Selection and the Option Contract.

    Remembering Your Conservative Profile as a Priority

    Dangers and Pitfalls in Using Options

      Allocation by Risk Profile

      Using Options to Reduce Market Risk

    Temptation to Select Most Volatile Stocks

      Creating a List of Potential Investments 

    Creating Sensible Conservative Standards

      The Five Conservative Standards for Stock Selection

    Maintaining Fundamental Clarity

      Distinctions: Risk Standards Versus Brand Loyalty

    The Importance of Taxes in the Option Equation

      Five Tax Guidelines

    Option Volatility to Judge Stocks

      Volatility as an Early Indicator

Appendix: Option Trading Strategies.

Glossary.

Index.

Updates

Submit Errata

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