THE OPTIONS COURSE
Options are one of the most profitable tools available to traders to day. They offer traders the ability to leverage positions, manage risk, and enhance returns on existing portfolios. To those who choose to trade options, this book provides the practical knowledge— from basic concepts to sophisticated techniques—necessary for successful options trading. It is designed to provide novice and intermediate traders with methods and strategies that will enhance profits and manage risk more effectively.
The investment world has gone through amazing gyrations since the first edition of The Options Course was released back in 1998. We have lived through the boom of the Internet along with the subsequent bust— when the dot-com became the dot-bomb. During this period, fortunes were made and lost virtually overnight. Traders who made money so fast they didn’t know what to do with it turned around and lost it so fast it made their heads spin. It is always painful to see how fast investors can lose money—especially when techniques to limit risk could easily have been employed.
In addition to this wild time in early 2000, we saw a precipitous decline in the technology sector as well as in many blue-chip stocks. In the years following the collapse of the Internet bubble, almost everyone lost money. Even people with mutual funds saw tremendous drops in their monthly statements. Meanwhile, many small as well as institutional investors kept betting that the market would rebound, only to see it fall again and again. This continual drain destroyed the confidence of many stock market players.
Conversely, bond investors saw their yields rise dramatically as the Federal Reserve had to keep dropping interest rates. Apparently, the economic slowdown would not halt unless dramatic reductions in interest rates could spur economic recovery. It was a slow process and the American economy continues to slowly recover. World events have also changed our lives dramatically. September 11, 2001, was one of the most horrific and unforgettable events in the history of humankind. Unfortunately, too many mothers, daughters, fathers, and sons as well as all the heroes of 9/11 will be remembered in history due to the horrible deeds of a few.
As someone who was in New York and saw this event firsthand, I will never forget this day for the rest of my life. This event—along with surviving Hodgkin’s disease when I was only 18—has led me to understand the importance of living life to its fullest every day. Undoubtedly it has woken us all up; we are now more fully aware of the global scope of the world we live in and the importance of appreciating the gift of life on this amazing planet.As options traders, we have to focus on the many events that can make markets move in any one of three directions: up, down, or sideways. One of the most vital factors that must become part of your daily market approach is to pay close attention to volatility.
How fast can an event drive the markets, and how can we take advantage of this event? What strategies can be employed when historical and implied volatility diverge? Options provide the knowledgeable investor or trader opportunities to create scenarios that others may not see. A stock investor can only buy or sell a stock, whereas an options trader can have a number of different strategies for different time frames. I like to say that we are playing a chess game with the markets. The market makes a move; I counter that move until, hopefully, I “checkmate” the market.
During the past 10 years of teaching individuals how to make money in the markets, I have had the opportunity to meet thousands of people, and they each seek ways to improve their lives—both for themselves and for their families. I hope that your own personal success will enable you to help your loved ones. Just remember that life is short and there are many roads it may take; but if we do our best to be good to others, then any path we take should also reward us many times over.
I certainly hope this book will help you to change your life in a positive way. The powerful strategies reviewed in it offer traders the ability to consistently make good returns when these trading approaches are solidly understood and strategically applied. Although at times it may seem like an insurmountable task to comprehend all aspects of options, I promise that it is well worth the effort. Just think back at how much time and money you spent in getting to where you are today. A little more consistent time and effort can reward you many times over.
The first question you need to ask yourself is: Why do you want to trade? The most common answer is to make more money. While trading can provide a great living, it’s important to make sure you love what you do—no matter what it is. This will lead you to become more successful in the field of your choice. Once you have asked yourself why you want to trade, then ask yourself why you want to trade options. Most individuals want to trade options because these incredibly flexible instruments enable traders to control an asset for less money. For example, let’s say I want to buy your house from you one year from today.
I am willing to pay you the appraised value today plus another 10 percent on top of that. (If you don’t take 10 percent, maybe I offer 15 percent or 25 percent.) Once you agree on the price and I pay you a deposit (known as the premium), I will have an option contract to purchase an asset (your house) at an agreed-to time (one year from today) at an agreed-to price. For this I pay you a premium. This is a simple example of a call option. The buyer (me) will have a right to buy the asset (your house) from the seller of the option (you), who will have an obligation to deliver the option (sell the house) to the option buyer.
If you want the right to sell an asset, you can employ the use of a put option. A good analogy can be the purchase of auto insurance, which provides the right to sell your car (the asset) to the seller of the put (the insurance company) if the value goes down due to an accident. Let’s say you purchase a policy that values your car at $25,000 and you pay $1,000 for one year’s coverage. What you have done is purchased the right to sell your car (the asset) for $25,000 for a one-year period in exchange for the premium of $1,000. If nothing happens in the year, your option will “expire worthless” and you will have to buy another put option (next year’s insurance policy).
These relatively simple analogies are the initial steps to managing trading risk and leveraging your capital more effectively. In this book, you can learn how to use these amazing trading instruments in the volatile markets of the twenty-first century. I have been fortunate to work with some of this country’s best traders. This has enabled me to pass on an abundance of knowledge geared to help people become successful traders. This information comes from years of experience spanning from my first days as a novice trader through my experience running a floor trading operation at the American Stock Exchange and in the Chicago futures pits.
It is my sincere hope that you can learn to develop moneymaking trading acumen by reading this book. Most importantly, you will be able to avoid many of the costly errors commonly made in trading and investing and ascend your own learning curve in leaps and bounds. I have confidence that you will gain significant insight into the world of investing by studying the strategies in this book. By applying this knowledge to stocks, futures, and options markets, I have no doubt that you will find trading a lucrative endeavor.