The Option Trader Handbook: Strategies and Trade Adjustments, Second Edition

402 Pages·2010·4.78 MB·English

by  George Jabbour

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The Option
Trader
Handbook
Strategies and
Trade Adjustments
Second Edition
GEORGE M. JABBOUR, PhD
PHILIP H. BUDWICK, MsF
JohnWiley&Sons,Inc.
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Copyright(cid:1)C 2010byGeorgeM.JabbourandPhilipH.Budwick.Allrightsreserved.
PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey.
PublishedsimultaneouslyinCanada.
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LibraryofCongressCataloging-in-PublicationData:
Jabbour,George(GeorgeMoussa)
Theoptiontraderhandbook:strategiesandtradeadjustments/GeorgeM.Jabbour,
PhilipH.Budwick.–2nded.
p.cm.–(Wileytradingsystem)
ISBN978-0-470-48161-5(cloth)
1.Options(Finance) 2.Options(Finance)–Prices. 3.Stockoptions. I.Budwick,Philip.
II.Title.
HG6024.A3J32 2010
332.64(cid:2)53–dc22
2009041414
PrintedintheUnitedStatesofAmerica.
10 9 8 7 6 5 4 3 2 1
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To our families: Thank you for all your love and support.
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Contents
Preface to the First Edition xiii
Preface to the Second Edition xvii
CHAPTER 1 Trade and Risk Management 1
Introduction 1
ThePhilosophyofRisk 2
TruthAboutReward 5
RiskManagement 6
Risk 6
Reward 9
BreakevenPoints 11
TradeManagement 11
TradingTheme 11
TheThemeofYourPortfolio 14
DiversificationandFlexibility 15
TradingasaBusiness 16
Start-UpPhase 16
GrowthPhase 19
MaturePhase 20
JustBusiness,NothingPersonal 21
SCORE—TheFormulaforTradingSuccess 21
SelecttheInvestment 22
ChoosetheBestStrategy 23
OpentheTradewithaPlan 24
RememberYourPlanandSticktoIt 26
ExitYourTrade 26
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vi CONTENTS
CHAPTER 2 Tools of the Trader 29
Introduction 29
OptionValue 30
OptionPricing 31
StockPrice 31
StrikePrice 32
TimetoExpiration 32
Volatility 33
Dividends 33
InterestRates 33
OptionGreeksandRiskManagement 34
TimeDecay 34
TradingLessonsLearnedfromTimeDecay(Theta) 41
Delta/Gamma 43
Deep-in-the-MoneyOptions 46
ImpliedVolatility 49
EarlyAssignment 63
SyntheticPositions 65
SyntheticStock 66
LongStock 66
ShortStock 67
SyntheticCall 68
SyntheticPut 70
BasicStrategies 71
LongCall 71
ShortCall 72
LongPut 73
ShortPut 74
BasicSpreadsandCombinations 75
BullCallSpread 75
BullPutSpread 76
BearCallSpread 77
BearPutSpread 78
LongStraddle 78
LongStrangle 79
ShortStraddle 80
ShortStrangle 81
AdvancedSpreads 82
CallRatioSpread 82
PutRatioSpread 83
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Contents vii
CallRatioBackspread 84
PutRatioBackspread 85
LongButterflies 86
ShortButterflies 87
LongCalendarSpreads 88
ShortCalendarSpreads 89
TheGreeksandSpreadTrades 90
Delta/Gamma 91
Vega 92
OtherGreeksandSpreads 93
ValuableDerivativeTradersProgram 93
Step1:VEGAandImpliedVolatility(IV) 94
Step2:DeltaandStrikeSelection 96
Step3:ThetaandHowMuchTimetoExpiration 97
PuttingtheProgramtoWork 99
IntroductiontoTradeAdjustments 100
CHAPTER 3 Long Stock 105
Introduction 105
ProtectivePut 106
StockMovesHigher 109
StockMovesLower 111
BearPutSpread 114
RollingfromaProtectivePutintoaBear
PutSpread 116
RollingfromaBearPutSpreadintoa
ProtectivePut 118
CallReplacement 120
StockMovesHigher 121
StockMovesLower 122
CallReplacementversusProtectivePut 123
SellCoveredCalls 123
StockMovesHigher 125
StrikeSelection 127
IntheMoneyCalls 128
TimetoExpiration 131
Scaling-OutStrategy 132
Collars 134
OpeningPosition—RegularCollar 134
StockMovesHigher—ProfitCollar 137
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viii CONTENTS
RatioWrite 139
OpeningPosition 140
StockMovesHigher—RegularRatioWrite 143
StockMovesHigher—VariableStrikeRatioWrite 149
StockMovesLower—RatioWrite/VariableStrikeRatioWrite 153
ShortStraddle/ShortStrangle 156
OpeningPosition—ShortStraddle 156
OpeningPosition—ShortStrangle 160
StockMovesHigher—ShortStraddle 163
StockMovesHigher—ShortStrangle 168
StockMovesLower—ShortStraddle/StockRepair 172
StockMovesLower—ShortStrangle 176
CallRatioSpread 179
OpeningPosition 182
StockMovesHigher 186
StockMovesLower—StockRepairStrategy 191
CallCalendarSpread 193
OpeningPosition 195
StockMovesHigher 196
CHAPTER 4 Short Stock 201
Introduction 201
ProtectiveCall—Insurance 203
OpeningPosition—ProtectiveCall 203
OpeningPosition—ProtectiveCallSpread 208
ShortStock+ProtectiveCall=LongPut 210
StockMovesLower—ProtectiveCall 212
StockMovesLower—ProtectiveCallSpread 215
RollingbetweenProtectiveCallsandProtectiveCallSpreads 219
StockMovesHigher 221
PutReplacement 223
StockMovesLower 224
StockMovesHigher 226
PutReplacementversusProtectiveCall 227
CoveredPuts 228
StockMovesLower 229
ShortCollars 234
OpeningPosition—RegularCollar 235
StockMovesLower—ProfitCollar 237