Joe Duarte
Trading Options For Dummies®, 2nd Edition
Trading Options For Dummies®, 2nd Edition
Published by: John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, www.wiley.com
Copyright © 2015 by John Wiley & Sons, Inc., Hoboken, New Jersey
Published simultaneously in Canada
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Library of Congress Control Number: 2014954665
ISBN 978-1-118-98263-1 (pbk); ISBN 978-1-118-98264-8 (ePub); ISBN 978-1-118-98265-5 (PDF)
Introduction
Welcome to Trading Options For Dummies, 2nd Edition!
This book is about introducing you to option strategies for managing risk and navigating a variety of market conditions. It’s geared to managing risk first, with the knowledge that profits will follow. With that in mind, the approaches described focus on reducing potential losses from traditional stock positions and building an option strategy repertoire that allows you to maximize your chances of making sound trades whether the markets are moving up, down, or sideways. To incorporate the comprehensive steps required when trading, it also provides discussions on market and sector analysis, as well as things to look for when trying out a new strategy.
An option contract is a unique security that comes with contract rights and obligations. When used correctly, an option contract strikes a balance between risk of loss, the amount of money you put at risk, and reward, providing you with leverage while still allowing you to reduce overall trade risk. Of course, there’s another side to that leverage, increased risk, which will be managed, which is the main reason you should take the time to read through this book carefully. You need to understand the risks and characteristics associated with these contracts.
There are hundreds of trading titles out there, including those focusing on option strategies. This book focuses primarily on approaches aimed at managing risk – the consistent theme throughout. By setting it up this way, you can read about different topics while keeping that key objective in mind. So go ahead, jump around to areas that interest you most.
This book can be read from cover to cover or used as a reference guide. Each strategy provided identifies risks and rewards associated with the position. It also identifies alternative strategies to consider for risk management, when applicable. There are a million ways to successfully trade the markets, but certain challenges are universal to all of them. Tools and techniques focused on addressing these challenges are also provided throughout.
To make reading and understanding the world of options trading a bit easier, we’ve used some conventions to help you along the way:
✔ Italics: We provide newly defined terms in italics in all parts and chapters.
✔ Acronyms: We try to spell out acronyms quite a bit so you don’t have to flip around a bunch to find out what VIS (very important strategy) stands for – we hate when we have to do that, too.
✔ Glossary: You’ll find an online glossary of option trading terms at www.dummies.com/extras/tradingoptions so you can find the definitions that you need fast.
✔ Websites: You’ll find references to websites that may provide additional information or make a task easier (like the one in the preceding bullet). And if you ever see a website split from one line to the next, rest assured that we’ve added no extra hyphens, so type the site in your browser just as it appears. If you’re reading the e-book, just tap the link to go to that website.
Here’s what we assume about you:
✔ You have some experience. We are all dummies, but we are not all beginners. If you’ve chosen this book, you doubtless have some familiarity with the stock market and the risks and rewards it presents to you. As a self-directed investor, you seek ways to manage those risks and rewards. However, if you’re not familiar at all with options or you’ve just had a little exposure to them, don’t worry – option fundamentals and mechanics are covered here and may be a great way to improve your knowledge base. Even if you have traded these instruments before, you can consider this a review if you’re looking for one.
✔ You’ve read investing books before and you will read this section carefully at some point in order to avoid pitfalls and misunderstandings as you go through this book. We assume that you know that this book won’t have all the answers to your trading needs but you also know that it was written in a careful and thoughtful way, including technical reviews and careful editing. You also know that as a second edition, the editing team has taken previous material and scrupulously revised it in order to both update and improve the content as needed.
✔ You hold longer-term investments. Regardless of whether or not you choose to actively trade options, we assume you hold longer-term investments such as stocks and mutual funds. For that reason, core strategies aimed at managing