Options Trading Primer By Marketwise Trading School (2002).pdf

Options Primer

TABLE OF CONTENTS

TABLE OF CONTENTS ..................................................................................................1

DISCLAIMER ...................................................................................................................5

WHAT IS AN OPTION? ..................................................................................................6

OPTION HISTORY.........................................................................................................6

OPTION EXCHANGES ...................................................................................................8

THE BASICS ...................................................................................................................10

STANDARDIZED OPTIONS.......................................................................................10

100 SHARES .................................................................................................................10

PRICING .......................................................................................................................10

EXPIRATION/EXERCISE...........................................................................................11

SYMBOLOGY ..............................................................................................................12

SETTLEMENT..............................................................................................................13

MONINESS...................................................................................................................13

RIGHTS VS OBLIGATION...........................................................................................13

OPENING AND CLOSING TRANSACTIONS.............................................................14

OPEN INTEREST.........................................................................................................14

OPENING ROTATION.................................................................................................15

CHARTING: PROFIT, LOSS AND PRICING............................................................15

POSITIONS......................................................................................................................16

LONG STOCK ..............................................................................................................16

SHORT STOCK ............................................................................................................16

LONG CALL .................................................................................................................17

SHORT CALL ...............................................................................................................17

LONG PUT....................................................................................................................17

SHORT PUT..................................................................................................................17

SYNTHETICS ...............................................................................................................18

PRICING MODELS ........................................................................................................20

T HE B LACK -S CHOLES M ODEL ........................................................................................20

T HE B INOMIAL M ODEL ...................................................................................................21

O THER M ODELS USED FOR A MERICAN O PTIONS .............................................................23

Roll, Geske and Whaley .............................................................................................23

Barone-Adesi and Whaley .........................................................................................23

GREEKS ...........................................................................................................................23

DELTA ..........................................................................................................................24

Position Delta ............................................................................................................24

GAMMA........................................................................................................................26

Position Gamma ........................................................................................................27

VEGA ............................................................................................................................28

THETA ..........................................................................................................................28

THE GAMEPLAN...........................................................................................................30

PLAN YOUR TRADE THEN TRADE YOUR PLAN ..................................................30

BUSINESS BUILDING QUESTIONS .........................................................................32

SHORT TERM TRADING..........................................................................................32

MEDIUM TERM TRADING......................................................................................32

LONGER TERM TRADING ......................................................................................32

ACCOUNT MANAGEMENT ......................................................................................33

TRADE MANAGEMENT ............................................................................................34

Stops based on the Stock Price ..................................................................................34

SELLING FOR A PROFIT.........................................................................................35

Set a sell immediately after you buy!.........................................................................35

What to sell for?.........................................................................................................35

TYPES OF CLOSES ......................................................................................................35

Exiting On The Upside...............................................................................................36

Exiting On The Downside ..........................................................................................36

POSITION STRATEGY.................................................................................................37

COVERD CALL............................................................................................................37

COVERED PUT ............................................................................................................39

MARRIED PUTS ..........................................................................................................39

MARRIED CALLS .......................................................................................................40

LONG CALLS ...............................................................................................................40

LONG PUTS ..................................................................................................................41

SPREAD TRADING.....................................................................................................41

DEBIT SPREADS .........................................................................................................42

Bullish Debit Spreads ................................................................................................42

Bearish Debit Spreads ...............................................................................................42

Horizontal Time Spreads ...........................................................................................43

Long Ratio Bear Spread ............................................................................................43

Long Ratio Bull Spread .............................................................................................43

CREDIT SPREADS .......................................................................................................44

Bearish Credit Spreads ..............................................................................................45

Short Ratio Bull Spread .............................................................................................45

Short Ratio Bear Spread ............................................................................................46

SHORT CALL ...............................................................................................................46

SHORT PUT..................................................................................................................47

STRADDLES & STRANGLES ....................................................................................47

Short Straddle ............................................................................................................47

Short Strangle ............................................................................................................48

Long Straddle.............................................................................................................48

Long Strangle.............................................................................................................48

COMPLEX STRATEGIES ...........................................................................................49

Long Butterfly ............................................................................................................49

Short Butterfly............................................................................................................49

Iron Butterfly .............................................................................................................49

Short Iron Butterfly....................................................................................................50

Long Condor..............................................................................................................50

Short Condor .............................................................................................................50

RISK COLLAR OR FENCE...........................................................................................50

STOCK AND OPTION REPAIR ....................................................................................51

Stock Repair...............................................................................................................51

Option Repair ............................................................................................................52

OPTIONS INDICATORS...............................................................................................52

P UT /C ALL R ATIOS ..........................................................................................................52

O PEN I NTEREST ..............................................................................................................52

T RIPLE W ITCHING ...........................................................................................................52

LEAPS ..............................................................................................................................52

INDEX OPTIONS ...........................................................................................................53

MARGINS........................................................................................................................53

TAXES ..............................................................................................................................56

TRADING APPLICATIONS .........................................................................................57

ORDER ENTRY..............................................................................................................58

OPTION RESOURCES ..................................................................................................58

GLOSSARY OF OPTION TERMS...............................................................................59

DISCLAIMER

The following presentation is intended for educational purposes only. Trading

strategies and position sizes are not suitable for all investors. References and links

to other websites and sources are not recommendations nor have they been judged

by Market Wise Trading School, LLC. to be accurate or reliable in part or in their

entirety. References and links to other websites and sources may not be construed

as partnerships or endorsement in anyway between or among these other parties

and Market Wise Trading School, LLC.

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