Trading Options to Win: Profitable Strategies and Tactics for Any Trader

321 Pages·2003·0.79 MB·English

by  S. A. Johnston Stuart Johnston

Trading
Options
to Win
Profitable Strategies and
Tactics for Any Trader
S. A. JOHNSTON
John Wiley &Sons, Inc.

Trading
Options
to Win
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Trading
Options
to Win
Profitable Strategies and
Tactics for Any Trader
S. A. JOHNSTON
John Wiley &Sons, Inc.
Copyright © 2003 by S. A. Johnston. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
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Library of Congress Cataloging-in-Publication Data:
Johnston, S. A.
Trading options to win : profitable strategies and tactics for any trader /
S. A. Johnston.
p. cm.
ISBN 0-471-22685-8 (alk. paper)
1. Stock options. I. Title.
HG6042 .J64 2003
332.64′5—dc21
2002153117
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
Contents
Preface vii
CHAPTER 1 Making Money with Money 1
CHAPTER 2 On the Trail of a Method: Risk, Leverage,
and Markets 22
CHAPTER 3 Profitability 101: Expectation and Options 45
CHAPTER 4 Just the Facts, Ma’am: Avoiding
Moonshine, Morons, and Myths 71
CHAPTER 5 No Hammer, No House: The Tools of
the Trader 89
CHAPTER 6 Thomas More’s Revenge: A Strategy for All
Seasons 100
CHAPTER 7 Apocalypse Never: The Uses of Defense 122
CHAPTER 8 Don’t Just Stand There, Do Something:
The Straddle 146
v
vi Contents
CHAPTER 9 Don’t Just Do Something, Stand There:
The Strangle 168
CHAPTER 10 Hi-Yo, Yogi! Riding the Bear 188
CHAPTER 11 The King of Strategies: The Martian
Ratio-Spread 207
CHAPTER 12 Every Once in a While: The Picador 226
CHAPTER 13 Pay Me after Lunch: The Endplay 238
CHAPTER 14 Filling in the Cracks: Ideas,
Understanding, and Winning 252
APPENDIX A Studies of Historical Gross Movement in
Selected Markets, 1990–2002 263
APPENDIX B Distribution of Contract Highs and Lows in
Selected Markets, 1980–2002 280
Index 297
Preface
T
here are thousands of books about trading. Some books approach trad-
ing as an exercise in mathematics and focus on effective ways to turn
the mathematics of the marketplace into a profit-generation machine.
Some approach trading as an exercise in psychology and tactics, attempting
to generate profit from a correct understanding and appreciation of what the
other traders in the market are doing. Some are catalogues of strategies.
Some apply economic, statistical, or logical principles to trading in the mar-
ketplace. Some are practical guides to the minutiae of markets.
This book either fits into none of those categories or is a mixture of all
of them with several other topics included. I’m not sure which. What it is, at
bottom, is my understanding of the whats, hows, and whys of earning a trad-
ing profit, acquired over 30 years of trading in all sorts of markets (allsorts—
remind me to tell you sometime about the great caviar-for-condoms caper).
I didn’t become a steadily profitable trader until I came to understand some
of the assumptions and conditions that underlie markets and to figure out
certain practical and usually effective ways to combat the assorted risks
that markets present; in short, to learn to deal effectively with the nature of
the beast.
This book is informal, because I’m an informal guy. There’s almost noth-
ing I like better than talking with other traders about trading, and so the text
is written in a generally conversational style. We will crunch a few numbers
on occasion, to clarify various topics and as an aid in looking at practical
examples of trading, but there are no formal mathematical demonstrations at
all in this book for two very good reasons.
First, a number of fine analysts and remarkable scholars have published
extensive compilations of the mathematics involved in quantitative analy-
sis, numerical methods, and risk and price modeling, and there’s no point
whatever in even attempting to replicate their efforts. A motto of mine is,
“Always go to the bestsource available,” which is usually the original author.
Who wants to read a rewrite of someone else’s work, anyway, particularly
a very good original work? Can you even imagine Hamlet as rewritten by,
say, Danielle Steele? Ghastly thought.
vii