In Getting Started in Advanced Options, Illustrated Edition, bestselling author Michael C. Thomsett uses nontechnical, easy-to-follow language to demystify the options markets, distinguishing the imagined risks from the real ones and arming investors with the facts they need to make more informed decisions. This illustrated edition includes colourful illustrations, including charts and graphs that make complex subject matter easy to understand.
Every investor and trader wants to combine several attributes in the stock portfolio: diversification, leverage, safety, and profitability. This is a big order. How can you create all of these elements in the same portfolio? Tradition advises that if you want profits, you have to give up safety, and that if you want to use leverage, you have to take on greater risk. In this book, these traditional problems are challenged by demonstrating how to combine the desirable attributes while managing and even eliminating the undesirable ones.
Options, once reserved for speculators and those able to tolerate high risk, have become mainstream devices for portfolio management. Many advanced option strategies can be applied so that risks are held down or even hedged entirely, while even conservative investors may create profits by combining options with stock positions.
Can options be used in a conservative manner? Yes; in fact, one of the best aspects to this market is that it can be designed to fit a range of risk tolerance profiles. The highly conservative investor may use options to reduce risk in long stock positions. On the far end of the spectrum, the speculator can continue to use options to swing trade, leverage, and seek fast profits. The range of strategies covers the entire risk spectrum.
This book presents a range of advanced strategies. It demonstrates how market volatility works as an advantage when options are properly used to profit from uncertainty. Spreads and straddles provide the means for designing an options portfolio to accomplish many goals. These include creation of a small but consistent profit potential in exchange for equally limited risk exposure.
The later chapters in the book examine some very interesting option strategies for even greater profits than those available from option trading on equities. Options on futures are very exciting; since futures are leveraged instruments already, options on futures are “leverage on leverage.” Trading options is much safer than trading directly in futures, however. Just as trading options on stocks is cheaper and often safer than trading shares directly, you can trade options on futures directly or through commodities-based exchange-traded funds (ETFs) or index funds. This market opens up many possibilities for large profits, while limiting risks to the relatively low cost of the option.
Index options are equally exciting. An index provides built-in diversification and broad exposure, in comparison to the very limited diversification available when you trade shares. The flexibility of options opens many additional possibilities, including trading not in the underlying security, but in synthetic stock positions. The use of offsetting options is low-cost or no-cost (because the cost of long options is covered by income from short options); and the synthetic position moves exactly like the underlying security. Using synthetics allows traders to benefit from changes in the security price, but without needing to place a large amount of capital at risk.
The discussion of risk itself is often left out of investment and trading books, and this is a mistake. Clearly, risks have to exist in all markets, especially in options, or there would be no opportunity for profit. In options, traders need to understand the range of risks before placing capital into strategies. Too many option traders take on greater risks than they can afford, not so much because they don’t understand risk but because they are attracted to the trade itself. You are far better off settling for smaller and more consistent profits than going for broke& and going broke. The risk discussion is always one of the most important and essential elements in any investment strategy.
A later chapter explains how taxes work on option trading. As odd as the tax code is, rules for options are among the most complicated. This chapter by no means provides a comprehensive explanation of the technical rules applied to option profits and losses; but it does highlight the major considerations every trader needs to be aware of and should discuss with a tax adviser before entering into advanced strategies.
This book is designed to provide you with all of the tools you need to master the strategic and management aspects of advanced option trading. These attributes include:
- Definitions in context. Every term is defined in the space next to the text as it is introduced. All definitions are also summarized in the Glossary at the end of the book.
- Illustrations. The book includes dozens of illustrations designed to visually summarize key points and to show how strategies play out and are applied.
- Key Points. These highlighted, brief statements provide you with the brief major points to be taken away from each section as it is presented.
- Valuable Resources. These link you to the world of options resources and provide the benefits of access to topics and features that will improve your trading capabilities.
- Examples. The text includes many examples that emphasize the points being offered, and show how strategies apply when put into trading modes.
- End-of-chapter comic summaries. Each chapter concludes with a summary of highlights in the form of a comic strip. This is meant to highlight the key points, but in an entertaining and amusing manner seldom found in books on such technical subjects. This makes the book enjoyable on a new and different level.
The purpose to this series is to help investors and traders master advanced strategies–not only to understand the techniques and steps of each, but also to develop a context for them. This means being aware of risks as well as opportunities. Advanced options as a strategic approach to portfolio management are exciting because you can design your own level of risk as a basic step in folding options into the risk-reduction strategies. Portfolio health should always be a primary goal and purpose for every investor. In spite of the long-standing reputation of options as having high risk and not being appropriate for most people, this book shows you how these amazing intangibles can be used to reduce risks while increasing profits.
- Strategies in Volatile Markets: Uncertainty as an Advantage
- Combinations and Spreads: Creative Risk Management
- Hedges and Straddles: More Creativity
- Options for Specialized Trading: Leveraging the Technical Approach
- Options on Futures: Leveraging Your Leverage
- Trading Index Options: Playing the Broader Market
- Synthetic Positions: Tracking the Stock
- Risk: Rules of the Game
- Taxes: The Wild Card of Options Trading
- Choosing Stocks: Finding the Right Ingredients
Getting Started in Advanced Options, Illustrated Edition By Michael C. Thomsett pdf