Options As a Strategic Investment,9780735201972

Options As a Strategic Investment

by
Edition: 4th
ISBN13: 9780735201972
ISBN10: 0735201978
Format: Hardcover
Pub. Date: 2002-03-01
Publisher(s): Prentice Hall Press
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Summary

The market in listed options and nonequity option products provides investors with a wealth of new, strategic opportunities for managing their investments. This updated and revised fourth edition of the bestselling options book of all time gives you the latest market-tested tools for maximizing the earnings potential of your portfolio while reducing downside risk -- no matter how the market is performing. Inside this expanded edition are scores of proven techniques and business-tested tactics for investing in many of the innovative new options products available. Book jacket.

Author Biography

Lawrence G. McMillan is President of McMillan Analysis Corp. that he founded in 1991. He currently authors and publishes The Option Strategist, Daily Volume Alerts, and The Daily Strategist, newsletters covering the derivatives markets. He writes regularly for magazines and Web sites, and gives numerous seminars and lectures on option trading Mr. McMillan holds a B.S. degree in mathematics from Purdue University (1968) and an M.S. in applied mathematics and computer science from the University of Colorado (1972)

Table of Contents

Preface xv
Part I BASIC PROPERTIES OF STOCK OPTIONS
Definitions
3(36)
Elementary Definitions
3(6)
Factors Influencing the Price of an Option
9(6)
Exercise and Assignment: The Mechanics
15(7)
The Option Markets
22(1)
Option Symbology
23(4)
Details of Option Trading
27(5)
Order Entry
32(2)
Profits and Profit Graphs
34(5)
Part II CALL OPTION STRATEGIES
Covered Call Writing
39(56)
The Importance of Covered Call Writing
39(3)
Covered Writing Philosophy
42(3)
The Total Return Concept of Covered Writing
45(2)
Computing Return on Investment
47(9)
Execution of the Covered Write Order
56(2)
Selecting a Covered Writing Position
58(4)
Writing against Stock Already Owned
62(4)
Diversifying Return and Protection in a Covered Write
66(4)
Follow-Up Action
70(17)
Special Writing Situations
87(6)
Covered Call Writing Summary
93(2)
Call Buying
95(23)
Why Buy?
95(2)
Risk and Reward for the Call Buyer
97(4)
Which Option to Buy?
101(2)
Advanced Selection Criteria
103(4)
Follow-Up Action
107(10)
A Further Comment on Spreads
117(1)
Other Call Buying Strategies
118(14)
The Protected Short Sale (or Synthetic Put)
118(4)
Follow-Up Action
122(1)
The Reverse Hedge (Simulated Straddle)
123(3)
Follow-Up Action
126(2)
Altering the Ratio of Long Calls to Short Stock
128(3)
Summary
131(1)
Naked Call Writing
132(14)
The Uncovered (Naked) Call Option
133(2)
Investment Required
135(2)
The Philosophy of Selling Naked Options
137(1)
Risk and Reward
138(6)
Summary
144(2)
Ratio Call Writing
146(26)
The Ratio Write
146(4)
Investment Required
150(1)
Selection Criteria
151(4)
The Variable Ratio Write
155(3)
Follow-Up Action
158(10)
An Introduction to Call Spread Strategies
168(4)
Bull Spreads
172(14)
Degrees of Aggressiveness
175(1)
Ranking Bull Spreads
176(3)
Follow-Up Action
179(1)
Other Uses of Bull Spreads
180(5)
Summary
185(1)
Bear Spreads Using Call Options
186(5)
The Bear Spread
186(3)
Selecting a Bear Spread
189(1)
Follow-Up Action
190(1)
Summary
190(1)
Calendar Spreads
191(9)
The Neutral Calendar Spread
192(2)
Follow-Up Action
194(2)
The Bullish Calendar Spread
196(1)
Follow-Up Action
197(1)
Using All Three Expiration Series
198(1)
Summary
199(1)
The Butterfly Spread
200(10)
Selecting the Spread
203(3)
Follow-Up Action
206(3)
Summary
209(1)
Ratio Call Spreads
210(12)
Differing Philosophies
213(4)
Follow-Up Action
217(4)
Summary
221(1)
Combining Calendar and Ratio Spreads
222(8)
Ratio Calendar Spread
222(3)
Choosing the Spread
225(1)
Follow-Up Action
226(1)
Delta-Neutral Calendar Spreads
227(2)
Follow-Up Action
229(1)
Reverse Spreads
230(6)
Reverse Calendar Spread
230(2)
Reverse Ratio Spread (Backspread)
232(4)
Diagonalizing a Spread
236(9)
The Diagonal Bull Spread
236(3)
Owning a Call for ``Free''
239(1)
Diagonal Backspreads
240(1)
Call Option Summary
241(4)
Part III PUT OPTION STRATEGIES
Put Option Basics
245(11)
Put Strategies
245(2)
Pricing Put Options
247(1)
The Effect of Dividends on Put Option Premiums
248(2)
Exercise and Assignment
250(3)
Conversion
253(3)
Put Option Buying
256(15)
Put Buying versus Short Sale
256(2)
Selecting Which Put to Buy
258(3)
Ranking Prospective Put Purchases
261(1)
Follow-Up Action
262(5)
Loss-Limiting Actions
267(3)
Equivalent Positions
270(1)
Put Buying in Conjunction with Common Stock Ownership
271(10)
Which Put to Buy
273(2)
Tax Considerations
275(1)
Put Buying As Protection for the Covered Call Writer
275(3)
No-Cost Collars
278(3)
Buying Puts in Conjunction with Call Purchases
281(11)
Straddle Buying
282(3)
Selecting a Straddle Buy
285(1)
Follow-Up Action
285(3)
Buying a Strangle
288(4)
The Sale of a Put
292(10)
The Uncovered Put Sale
292(3)
Follow-Up Action
295(1)
Evaluating a Naked Put Write
296(3)
Buying Stock below Its Market Price
299(1)
The Covered Put Sale
300(1)
Ratio Put Writing
300(2)
The Sale of a Straddle
302(19)
The Covered Straddle Write
302(3)
The Uncovered Straddle Write
305(2)
Selecting a Straddle Write
307(1)
Follow-Up Action
308(4)
Equivalent Stock Position Follow-Up
312(1)
Starting Out with the Protection in Place
313(2)
Strangle (Combination) Writing
315(3)
Further Comments on Uncovered Straddle and Strangle Writing
318(3)
Synthetic Stock Positions Created by Puts and Calls
321(8)
Synthetic Long Stock
321(2)
Synthetic Short Sale
323(2)
Splitting the Strikes
325(3)
Summary
328(1)
Basic Put Spreads
329(7)
Bear Spread
329(3)
Bull Spread
332(1)
Calendar Spread
333(3)
Spreads Combining Calls and Puts
336(22)
The Butterfly Spread
336(3)
Combining an Option Purchase and a Spread
339(3)
A Simple Follow-Up Action for Bull or Bear Spreads
342(3)
Three Useful but Complex Strategies
345(8)
Selecting the Spreads
353(3)
Summary
356(2)
Ratio Spreads Using Puts
358(9)
The Ratio Put Spread
358(3)
Using Deltas
361(1)
The Ratio Put Calendar Spread
361(3)
A Logical Extension (The Ratio Calendar Combination)
364(2)
Put Option Summary
366(1)
LEAPS
367(46)
The Basics
368(1)
Pricing LEAPS
369(5)
Comparing LEAPS and Short-Term Options
374(1)
LEAPS Strategies
375(7)
Speculative Option Buying with LEAPS
382(8)
Selling LEAPS
390(13)
Spreads Using LEAPS
403(6)
Summary
409(4)
Part IV ADDITIONAL CONSIDERATIONS
Buying Options and Treasury Bills
413(9)
How the Treasury Bill/Option Strategy Operates
413(8)
Summary
421(1)
Arbitrage
422(34)
Basic Put and Call Arbitrage (``Discounting'')
423(2)
Dividend Arbitrage
425(3)
Conversions and Reversals
428(2)
More on Carrying Costs
430(1)
Back to Conversions and Reversals
431(2)
Risks in Conversions and Reversals
433(4)
Summary of Conversion Arbitrage
437(1)
The ``Interest Play''
438(1)
The Box Spread
439(4)
Variations on Equivalence Arbitrage
443(1)
The Effects of Arbitrage
444(1)
Risk Arbitrage Using Options
445(9)
Pairs Trading
454(1)
Facilitation (Block Positioning)
455(1)
Mathematical Applications
456(37)
The Black-Scholes Model
456(10)
Expected Return
466(6)
Applying the Calculations to Strategy Decisions
472(10)
Facilitation or Institutional Block Positioning
482(3)
Aiding in Follow-Up Action
485(3)
Implementation
488(1)
Summary
489(4)
Part V INDEX OPTIONS AND FUTURES
Introduction to Index Option Products and Futures
493(38)
Indices
493(7)
Cash-Based Options
500(6)
Futures
506(6)
Options on Index Futures
512(4)
Standard Options Strategies Using Index Options
516(4)
Put-Call Ratio
520(3)
Summary
523(8)
Stock Index Hedging Strategies
531(48)
Market Baskets
531(6)
Program Trading
537(10)
Index Arbitrage
547(10)
Follow-Up Strategies
557(3)
Market Basket Risk
560(1)
Impact on the Stock Market
561(5)
Simulating an Index
566(8)
Trading the Tracking Error
574(3)
Summary
577(2)
Index Spreading
579(10)
Inter-Index Spreading
579(9)
Summary
588(1)
Structured Products
589(52)
Part I: ``Riskless'' Ownership of a Stock or Index
590(1)
The ``Structure'' of a Structured Product
590(3)
Cash Value
593(1)
The Cost of the Imbedded Call Option
594(1)
Price Behavior Prior to Maturity
595(1)
SIS
596(6)
Computing the Value of the Imbedded Call When the Underlying is Trading at a Discount
602(1)
The Adjustment Factor
602(5)
Other Constructs
607(6)
Option Strategies Involving Structured Products
613(5)
Lists of Structured Products
618(1)
Part II: Products Designed to Provide ``Income''
618(1)
PERCS
618(2)
Call Feature
620(2)
A PERCS is a Covered Call Write
622(1)
Price Behavior
623(2)
PERCS Strategies
625(11)
PERCS Summary
636(1)
Other Structured Products
637(3)
Structured Product Summary
640(1)
Mathematical Considerations for Index Products
641(11)
Arbitrage
641(3)
Mathematical Applications
644(8)
Futures and Futures Options
652(44)
Futures Contracts
653(7)
Options on Futures
660(14)
Futures Option Trading Strategies
674(9)
Commonplace Mispricing Strategies
683(12)
Summary
695(1)
Futures Option Strategies for Futures Spreads
696(31)
Futures Spreads
696(8)
Using Futures Options in Futures Spreads
704(16)
Summary
720(7)
Part VI MEASURING AND TRADING VOLATILITY
The Basics of Volatility Trading
727(22)
Definitions of Volatility
728(3)
Another Approach: GARCH
731(1)
Moving Averages
732(1)
Implied Volatility
732(2)
The Volatility of Volatility
734(9)
Volatility Trading
743(1)
Why Does Volatility Reach Extremes?
744(4)
Summary
748(1)
How Volatility Affects Popular Strategies
749(34)
Vega
749(4)
Implied Volatility and Delta
753(2)
Effects on Neutrality
755(2)
Position Vega
757(1)
Outright Option Purchases and Sales
757(5)
Time Value Premium is a Misnomer
762(3)
Volatility and the Put Option
765(1)
Straddle or Strangle Buying and Selling
766(1)
Call Bull Spreads
767(8)
Vertical Put Spreads
775(2)
Put Bear Spreads
777(1)
Calendar Spreads
778(2)
Ratio Spreads and Backspreads
780(2)
Summary
782(1)
The Distribution of Stock Prices
783(29)
Misconceptions about Volatility
783(4)
Volatility Buyer's Rule!
787(2)
The Distribution of Stock Prices
789(6)
What This Means for Option Traders
795(1)
Stock Price Distribution Summary
796(2)
The Pricing of Options
798(1)
The Probability of Stock Price Movement
798(11)
Expected Return
809(1)
Summary
810(2)
Volatility Trading Techniques
812(34)
Two Ways Volatility Predictions Can Be Wrong
813(1)
Trading the Volatility Prediction
814(23)
Trading the Volatility Skew
837(7)
Volatility Trading Summary
844(2)
Advanced Concepts
846(62)
Neutrality
846(2)
The ``Greeks''
848(18)
Strategy Considerations: Using the ``Greeks''
866(35)
Advanced Mathematical Concepts
901(6)
Summary
907(1)
Taxes
908(24)
History
908(2)
Basic Tax Treatment
910(3)
Exercise and Assignment
913(9)
Special Tax Problems
922(3)
Summary
925(1)
Tax Planning Strategies for Equity Options
925(5)
Summary
930(2)
The Best Strategy?
932(6)
General Concepts: Market Attitude and Equivalent Positions
932(2)
What is Best for Me Might Not Be Best for You
934(2)
Mathematical Ranking
936(1)
Summary
937(1)
Postscript 938(25)
Part VII APPENDICES
Appendix A Strategy Summary
943(2)
Appendix B Equivalent Positions
945(2)
Appendix C Formulae
947(10)
Appendix D Graphs
957(4)
Appendix E Qualified Covered Calls
961(2)
Glossary 963(20)
Index 983

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