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Getting Started in Advanced Options, Illustrated Edition


Advanced options strategies every savvy investor should know

When it comes to investing, going for greater profits means taking on greater risk, right?

Not necessarily.

In this follow-up to his bestselling Getting Started in Options, Michael C. Thomsett shows you why, despite their reputation for being high-risk instruments for daredevil speculators, options, when used properly, make a great, inexpensive tool for boosting returns while reducing investment risk.

Packed with full-color graphics that make complex concepts understandable at a glance, Getting Started in Advanced Options takes you beyond the basics to cover advanced strategies that even the most conservative investor can use with confidence.

In plain English, Michael shows you how to:

  • Use options to reduce risks in volatile markets
  • Profit from market uncertainty using options
  • Choose the best stocks for options trading
  • Trade options on futures—directly or through commodities-based ETFs and index funds
  • Trade index options for greater diversification and exposure
  • Use advanced spread strategies
  • Swing trade with options
  • Profit from price moves using both long and short straddles
  • Protect your portfolio with options hedging strategies

Like all the books in the Getting Started series, this volume features clear definitions of important terms and concepts, dozens of examples, and comic strips that highlight major points while providing an entertaining running narrative.

Don't miss this opportunity to discover the options strategies used by today's savviest investors to optimize their returns while protecting their portfolios—in all market conditions.

Michael C. Thomsetthas written numerous books on investing and trading. He regularly contributes to Seeking Alpha, Global Risk Community, the Chicago Board Options Exchange (CBOE) website, and other investing websites, and he writes articles for the AAII Journal and NAIC's Better Investing. He also teaches five classes at the prestigious New York Institute of Finance.

Acknowledgments vii

Element Key ix

Introduction xi

Chapter 1: Strategies in Volatile Markets: Uncertainty as an Advantage 1

Avoiding 10 Common Mistakes 3

Modifying Your Risk Tolerance 10

The Nature of Market Volatility 13

Market Volatility Risk 14

Options in the Volatile Environment 19

Chapter 2: Combinations and Spreads: Creative Risk Management 31

Overview of Advanced Strategies 34

Vertical Spread Strategies 41

Horizontal and Diagonal Spread Strategies 52

Altering Spread Patterns 57

Chapter 3: Hedges and Straddles: More Creativity 73

The Two Types of Hedges 73

Hedging Option Positions 77

Straddle Strategies 83

Theory and Practice of Combined Techniques 89

Chapter 4: Options for Specialized Trading: Leveraging the Technical Approach 95

Swing-Trading Basics 97

The Setup Signal 100

Testing the Theory 103

A Strategic View of Options for Swing Trading 107

Options Used for Other Trading Strategies 110

Swing- and Day-Trading Advanced Strategies 111

Chapter 5: Options on Futures: Leveraging Your Leverage 117

Important Distinctions 118

Regulatory Differences 124

Chapter 6: Trading Index Options: Playing the Broader Market 131

Advantages to Trading Index Options 133

Exercise and Expiration Rules 135

Index Option Strategies 137

Structured Index Options 140

Chapter 7: Synthetic Positions: Tracking the Stock 147

Synthetic Put (Protected Short Sale) 149

Synthetic Long Call (Insurance Put or Married Put) 151

Synthetic Long Stock 152

Synthetic Short Stock 155

Split Strike Strategy (Bullish) 157

Split Strike Strategy (Bearish) 159

Collars 162

Synthetic Straddles 169

Chapter 8: Risk: Rules of the Game 177

Identifying the Range of Risk 178

Evaluating Your Risk Tolerance 188

Chapter 9: Taxes: The Wild Card of Options Trading 195

Qualified Covered Calls--Special Rules 200

Looking to the Future 206

Chapter 10: Choosing Stocks: Finding the Right Ingredients 213

Developing an Action Plan 217

Selecting Stocks for Call Writing 220

Averaging Your Cost 225

Analyzing Stocks 230

Applying Analysis to Calls--the “Greeks” 250

Acting on Good Information 258

Glossary 267

Recommended Reading 285

About the Author 287

Index 289