small amount of time needed to implement them may be well worth it.
✔ You’ve already decided how to allocate your investment and trading dollars. Although we distinguish investment assets from trading assets, we don’t address how to allocate those dollars because everyone’s financial situation is different. We do assume this is something you’ve already completed, because plans should strike a balance between the two (long term and short term) to grow assets.
✔ You have computer and Internet access. We can’t imagine trading or investing without a computer and reliable access to the Internet.. so we assume you have both.
✔ You use a broker. We assume you contact a broker to further manage your risk when needed, and we assume you also have a comfort level with your broker’s web platform. It may serve as a resource for some of the ideas covered in this book.
To supplement the topics discussed in Trading Options For Dummies, 2nd Edition, we’ve also added icons to highlight different core ideas and give you some hard-earned trading insight. We use the following icons to point out these insights:
In addition to the material in the print or e-book you’re reading right now, this product also comes with some access-anywhere goodies on the Web. Check out the free Cheat Sheet at www.dummies.com/cheatsheet/tradingoptions for helpful summaries of trading order types, charts for tracking investments, how financial indexes are constructed, and ways in which changing stock affects indexes.
This book also includes some free articles – which are kind of “extra” mini-chapters. Go to www.dummies.com/extras/tradingoptions if you want to check these out.
Whether you’re seeking to improve longer-term investing or shorter-term trading results, you will find strategies aimed at both goals in this book. By using the techniques in the book and viewing yourself as a risk manager, your losses should decrease allowing you to move forward to increased profits.
You may decide to pick up this reference while evaluating your investments on a quarterly basis or keep it handy at your desk for weekly trading assessments. During your regular review routine, you may also find that current market conditions that once kept you on the sidelines are now ideal for strategies you reviewed here.
Ready to go? You have lots of options ahead. (Get it?)
If you’ve recently been perplexed with action in the markets, you may want to start with Chapter 5. It identifies different things happening in the options markets that may clarify stock market activity.
Those new to trading options or who feel you can benefit from a refresher, should consider perusing Part I. Because the markets are ever-evolving, Chapter 3 gets you up to speed on current conditions.
If you have a basic handle on option contracts and want to quickly access unique ways to capitalize on different stock movement, consider jumping to Part IV. This part includes a variety of approaches you just can’t match with stocks.
Chapter 18 provides my thoughts on what it takes to be a successful option trader. Because trading options comes with many of the same challenges encountered when trading any security, you may want to make it the first thing you read to help you succeed with your current trading.
Part I
Getting Started
In this part…
✔ An overview of options contracts
✔ Rights and obligations of buyers and sellers
✔ Trading securities on the exchanges
✔ Risks and rewards of contracts
Chapter 1
Options Trading and the Individual Investor
In This Chapter
Whatever your level of experience, your general tendency to trade or hold positions for a long time, and your risk profile, as an individual investor you can add options on individual stocks, indexes, and exchange traded mutual funds (ETFs) to your investment war chest. You should do so with two goals in mind: risk management and growing your assets. And because there are so many ways to use options, just about anyone can use them – as long as you take the time to learn the associated risks and rewards and become familiar with the particular strategies that suit your purposes.
There is a difference between trading and investing, especially in terms of time frames. Investing is all about using the power of time and the benefits of compounding to build wealth over long periods. The traditional buy and hold strategy for stocks is a perfect example, as is the owning of rental properties for long periods to generate income.
Trading is by design a shorter-term proposition, where you may hold a position for minutes, hours, days, or weeks. Options can be used for both trading over the short term and the protection of longer-term investments, especially during times when the value of the longer-term holdings declines. No matter your time frame – whether you hold positions for short or long periods – your goal is essentially the same. You want to have more money at some point in the future than what you have now and increase your wealth using opportunities provided by the markets. This chapter is all about giving you the big picture on options and setting the stage for the more detailed chapters that follow.
Before you start any kind of trading or investing program, it’s a good idea to know three things:
✔ Your risk profile
✔ Your financial situation
✔ Your time commitment possibilities
Any time you add a new trading strategy, only one thing is certain: the early stages will be challenging and will require a fair amount of your attention, or you will lose money, often in a hurry.
As you prepare to become an options trader, here are some simple steps to consider in order giving yourself a good start. Even if you are experienced in other forms of investing, or