Options Trading for the Conservative Investor: Increasing Profits Without Increasing Your Risk Book

Preface.

Acknowledgments.

About the Author.

1. Setting the Ground Rules.

The Ground Rules

A Model Portfolio

2. Option Basics.

The Workings of Option Contracts

Option Attributes to Determine Value

Intrinsic and Time Value Premium

Long-Term Options and Their Advantages

Strike Price of Options

The Time Advantage for Short Sellers

Long and Short

Taking Profits Without Selling Stock

Buyer and Seller Positions Compared

Understanding Short Seller Risks

Calls and Call Strategies

Is the Strategy Appropriate?

Option Terms and Their Meaning

The Cost of Trading

In, At, or Out of the Money

Puts and Put Strategies

The Overlooked Value of Puts

The Insurance Cost of Puts

Conservative Guidelines: Selling Puts

Puts as a Form of Contingent Purchase

Listed Options and LEAPS Options

Using Long Calls in Volatile Markets

Using LEAPS Puts in a Covered Capacity

Coordinating Strategies with Portfolio Goals

Option and Stock Volatility: The Central Element of Risk

Critical Analysis of Volatility

Free 20-Minute Delayed Quotes

The Black-Scholes Model

Identifying Your Market Opportunities

Limiting Your Strategies to Conservative Plays

Identifying Quality of Earnings

Trading Costs in the Option Analysis

Calculating the Net Profit or Loss

Tax Rules for Options: An Overview

The Importance of Professional Advice and Tax Planning

3. Options in Context.

The Nature of Risk and Reward

Using Volatility as the Primary Risk Measurement

Options Used to Mitigate Stock Investment Risk

Another Kind of Volatility

Lost Opportunity Risk and Options

Perceptions About Options

Finding the Conservative Context for Options Trading

Strategic Timing and Short-Term Price Changes

Short Positions, Naked or Covered

The Uncovered Call-A Violation of the Conservative Theme, Usually

A Stock's Likely Lowest Theoretical Price Level

Short Put Risks-Not as Drastic as Short Call Risks

Margin Requirements and Trading Restrictions

Other Margin Rules

Return Calculations-Seeking Valid Comparisons

Return If Exercised

Return If Expired

Long-Term Goals as a Guiding Force

Exercise as a Desirable Outcome

4. Managing Profits and Losses.

Your Conservative Dilemma

Deciding How to Establish Your Policies

Managing Profits with Options

Basing Decisions on the Fundamentals

The Reality of Risk

Overcoming the Profit-Taking Problem

Realizing Profits Without Selling Stock

Further Defining Your Personal Investing Standards

When a Rescue Strategy Is Appropriate

Reverting to a Secondary Strategy

Managing the Inertia Problem

Inertia Management

Taxes and Profits

Options Used for Riding Out Volatility

5. Options as Cash Generators.

The Covered Call Concept

Who Makes the Decision?

Examples: Ten Stocks and Covered Calls

Working within Pre-Established Standards

Calculating the Gain Comparatively

Smart Conservative Ground Rules

A Conservative Approach

Tax Ramifications of Covered Calls

Six Levels of Separation (of Your Money) for Taxes

Rolling Forward and Up-Exercise Avoidance

The Types of Rolls

The Exercise Acceptance Strategy

Remembering to Limit Yourself to Conservative Strategies

6. Alternatives to Stock Purchase.

Leverage and Options

Applications of Contingent-Purchase Strategies

The Long-Call Contingent-Purchase Strategy

Diversifying Exposure with Several Stocks in Play

Reducing Contingent Purchase Risks

The Covered Long Call

Extrapolating Future Strike Prices

Using the Forward Roll Effectively

Short Puts and Contingent Purchase

The Value of Selling Puts

The Value of Shorter Exposure Terms

Rescue Strategy Using Calls

Rescue Strategy Based on Smart Stock Choices

Programming a Profitable Result

The Ratio Write-Before Adjusting to Make It Conservative

Converting the Ratio Write into a Conservative Strategy

Ratio Writes for Rescue Strategies and Higher Current Returns

Rescue Strategy Using Puts

The Risk of Continued Price Declines

Covered Calls for Contingent Sale

Picking the Right Conditions for Forced Exercise

7. Option Strategies in Down Markets.

Thinking Outside the Market Box

Remembering the Fundamentals

Conservative Versus Speculative: Remembering the Difference

The Long Put: The Overlooked Option

When the Stock's Price Rises

When the Stock's Price Falls

Short Puts: A Variety of Strategies

Conservative Ground Rules for Short Puts

Comparing Rates of Return for Dissimilar Strike Prices

Three Types of Rescue Strategies

Using Calls in Down Markets

Calls Used for Leverage, but Not for Speculation

Evaluating Your Stock Positions

Rescue Strategies and Opportunity

Examining the Causes of Price Volatility

Deciding When to Sell and Replace Stock

Stock Positions and Risk Evaluation

The Relationship Between Stock Safety and Options

Examining Your Risk Profile

Options and Downside Risk

The Down-Market Benefits of Options

Option Planning with Loss Carryover

Timing: Matching Current-Year Profits and Losses

8. Combination Conservative Techniques.

Spread Techniques

Advanced Spread Terminology

Straddle Techniques

Short Straddles for Conservative Positions and High Rates of Return

Long or Short Positions

Mixing the Long and the Short

Theory Versus Practice

Simplicity as a Worthy Goal

Worst-Case Outcome as a Desirable Result

Tax Problems with Combination Strategies

The Anti-Straddle Rule and Its Effect

The Ultimate High-Return Strategy

A Review of Your Conservative Assumptions

Examples of the Strategy in Practice

Pick Your Portfolio

Pick Expiration Dates

Review Trading Range Trends

Look for Available Options and Strike Prices

Compare Yields

Select Stocks for the Short Combination Strategy

Outcome Scenarios

Planning Ahead for Each Outcome Scenario

The Augmented Strategy-A Short Straddle

How the Dollar Values Alone Can Mislead

Maximum Advantage: Large-Point Discounts

Rescue Strategies

Three Valuable Rescue Strategies

9. Stock Selection and the Option Contract.

Remembering Your Conservative Profile as a Priority

Dangers and Pitfalls in Using Options

Allocation by Risk Profile

Using Options to Reduce Market Risk

Temptation to Select Most Volatile Stocks

Creating a List of Potential Investments

Creating Sensible Conservative Standards

The Five Conservative Standards for Stock Selection

Maintaining Fundamental Clarity

Distinctions: Risk Standards Versus Brand Loyalty

The Importance of Taxes in the Option Equation

Five Tax Guidelines

Option Volatility to Judge Stocks

Volatility as an Early Indicator

Appendix: Option Trading Strategies.

Glossary.

Index.