The Option Trader Handbook: Strategies and Trade Adjustments

355 Pages·2004·1.15 MB·English

by  George Jabbour

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The Option
Trader
Handbook
Strategies and
Trade Adjustments
GEORGE M. JABBOUR, PhD
PHILIP H. BUDWICK, MsF
John Wiley & Sons, Inc.
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The Option
Trader
Handbook
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Founded in 1807, John Wiley & Sons is the oldest independent
publishing company in the United States. With offices in NorthAmerica,
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tomers’ professional and personal knowledge and understanding.
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vived the market’s ever changing temperament and have prospered—
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a novice trader, professional or somewhere in-between, these books
will provide the advice and strategies needed to prosper today and
well into the future.
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www.WileyFinance.com.
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The Option
Trader
Handbook
Strategies and
Trade Adjustments
GEORGE M. JABBOUR, PhD
PHILIP H. BUDWICK, MsF
John Wiley & Sons, Inc.
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Copyright © 2004 by George Jabbour and Philip Budwick All rights reserved.
Published 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
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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
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The advice and strategies contained herein may not be suitable for your situation. You
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Library of Congress Cataloging-in-Publication Data:
Jabbour, George (George Moussa)
The option trader handbook : strategies and trade adjustments / George
Jabbour, Philip Budwick.
P. cm.
ISBN 0–471–56707–8 (cloth : alk. paper)
1. Options (Finance) 2. Options (Finance)—Prices. 3. Stock
options. I. Budwick, Philip. II. Title.
HG6024.A3 J32 2004
332.64'53—dc22
2003026646
Printed in the United States of America
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Contents
Preface xi
CHAPTER 1 Trade and Risk Management 1
Introduction 1
The Philosophy of Risk 2
Truth about Reward 5
Risk Management 7
Risk 7
Reward 10
Breakeven Points 11
Trade Management 12
Trading Theme 12
The Theme of Your Portfolio 15
Diversification and Flexibility 16
Trading as a Business 16
Start-Up Phase 17
Growth Phase 20
Mature Phase 20
Just Business, Nothing Personal 21
SCORE—The Formula for Trading Success 22
Select the Investment 22
Choose the Best Strategy 24
Open the Trade with a Plan 24
Remember Your Plan and Stick to It 26
Exit Your Trade 27
CHAPTER 2 Tools of the Trader 29
Introduction 29
Option Value 30
v
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vi CONTENTS
Option Pricing 31
Stock Price 32
Strike Price 32
Time to Expiration 32
Volatility 32
Dividends 33
Interest Rates 33
Time Value Premium 33
Time Decay 33
Early Assignment 36
Implied Volatility 38
Synthetic Positions 41
Synthetic Stock 42
Synthetic Call 44
Synthetic Put 46
Basic Strategies 47
Long Call 47
Short Call 48
Long Put 48
Short Put 50
Basic Spreads and Combinations 50
Bull Call Spread 51
Bull Put Spread 51
Bear Put Spread 52
Bear Call Spread 53
Long Straddle 54
Long Strangle 54
Short Straddle 56
Short Strangle 57
Advanced Spreads 58
Call Ratio Spread 58
Put Ratio Spread 59
Call Ratio Backspread 60
Put Ratio Backspread 61
Long Butterflies 62
Short Butterflies 63
CHAPTER 3 Long Stock 65
Introduction 65
Protective Put 66
Stock Moves Higher 69
Stock Moves Lower 71
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Contents vii
Bear Put Spread 74
Rolling from a Protective Put into a Bear Put Spread 76
Rolling from a Bear Put Spread into a Protective Put 78
Call Replacement 80
Stock Moves Higher 81
Stock Moves Lower 82
Call Replacement versus Protective Put 83
Sell Covered Calls 83
Stock Moves Higher 85
Strike Selection 87
In the Money Calls 88
Time to Expiration 91
Scaling-Out Strategy 92
Collars 94
Opening Position—Regular Collar 94
Stock Moves Higher—Profit Collar 97
Ratio Write 100
Opening Position 101
Stock Moves Higher—Regular Ratio Write 103
Stock Moves Higher—Variable Strike Ratio Write 110
Stock Moves Lower—Ratio Write/Variable Strike Ratio Write 114
Short Straddle/Short Strangle 117
Opening Position—Short Straddle 117
Opening Position—Short Strangle 121
Stock Moves Higher—Short Straddle 123
Stock Moves Higher—Short Strangle 129
Stock Moves Lower—Short Straddle/Stock Repair 133
Stock Moves Lower—Short Strangle 137
Call Ratio Spread 140
Opening Position 143
Stock Moves Higher 147
Stock Moves Lower—Stock Repair Strategy 152
Call Calendar Spread 155
Opening Position 156
Stock Moves Higher 158
CHAPTER 4 Short Stock 163
Introduction 163
Protective Call—Insurance 165
Opening Position—Protective Call 165
Opening Position—Protective Call Spread 170
Short Stock (cid:1) Protective Call (cid:2) Long Put 172