The Option Trader Handbook Strategies and Trade Adjustments Second Edition George Jabbour Sample
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The Option
Trader
Handbook
Strategies and
Trade Adjustments
Second Edition
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best
efforts in preparing this book, they make no representations or warranties with respect to the
accuracy or completeness of the contents of this book and specifically disclaim any implied
warranties of merchantability or fitness for a particular purpose. No warranty may be created
or extended by sales representatives or written sales materials. The advice and strategies
contained herein may not be suitable for your situation. You should consult with a
professional where appropriate. Neither the publisher nor author shall be liable for any loss of
profit or any other commercial damages, including but not limited to special, incidental,
consequential, or other damages.
For general information on our other products and services or for technical support, please
contact our Customer Care Department within the United States at (800) 762-2974, outside the
United States at (317) 572-3993 or fax (317) 572-4002.
Wiley also publishes its books in a variety of electronic formats. Some content that appears in
print may not be available in electronic books. For more information about Wiley products,
visit our web site at www.wiley.com.
10 9 8 7 6 5 4 3 2 1
To our families: Thank you for all your love and support.
Contents
Introduction 1
The Philosophy of Risk 2
Truth About Reward 5
Risk Management 6
Risk 6
Reward 9
Breakeven Points 11
Trade Management 11
Trading Theme 11
The Theme of Your Portfolio 14
Diversification and Flexibility 15
Trading as a Business 16
Start-Up Phase 16
Growth Phase 19
Mature Phase 20
Just Business, Nothing Personal 21
SCORE—The Formula for Trading Success 21
Select the Investment 22
Choose the Best Strategy 23
Open the Trade with a Plan 24
Remember Your Plan and Stick to It 26
Exit Your Trade 26
v
vi CONTENTS
Introduction 29
Option Value 30
Option Pricing 31
Stock Price 31
Strike Price 32
Time to Expiration 32
Volatility 33
Dividends 33
Interest Rates 33
Option Greeks and Risk Management 34
Time Decay 34
Trading Lessons Learned from Time Decay (Theta) 41
Delta/Gamma 43
Deep-in-the-Money Options 46
Implied Volatility 49
Early Assignment 63
Synthetic Positions 65
Synthetic Stock 66
Long Stock 66
Short Stock 67
Synthetic Call 68
Synthetic Put 70
Basic Strategies 71
Long Call 71
Short Call 72
Long Put 73
Short Put 74
Basic Spreads and Combinations 75
Bull Call Spread 75
Bull Put Spread 76
Bear Call Spread 77
Bear Put Spread 78
Long Straddle 78
Long Strangle 79
Short Straddle 80
Short Strangle 81
Advanced Spreads 82
Call Ratio Spread 82
Put Ratio Spread 83
Contents vii
Introduction 105
Protective Put 106
Stock Moves Higher 109
Stock Moves Lower 111
Bear Put Spread 114
Rolling from a Protective Put into a Bear
Put Spread 116
Rolling from a Bear Put Spread into a
Protective Put 118
Call Replacement 120
Stock Moves Higher 121
Stock Moves Lower 122
Call Replacement versus Protective Put 123
Sell Covered Calls 123
Stock Moves Higher 125
Strike Selection 127
In the Money Calls 128
Time to Expiration 131
Scaling-Out Strategy 132
Collars 134
Opening Position—Regular Collar 134
Stock Moves Higher—Profit Collar 137
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viii CONTENTS
Introduction 201
Protective Call—Insurance 203
Opening Position—Protective Call 203
Opening Position—Protective Call Spread 208
Short Stock + Protective Call = Long Put 210
Stock Moves Lower—Protective Call 212
Stock Moves Lower—Protective Call Spread 215
Rolling between Protective Calls and Protective Call Spreads 219
Stock Moves Higher 221
Put Replacement 223
Stock Moves Lower 224
Stock Moves Higher 226
Put Replacement versus Protective Call 227
Covered Puts 228
Stock Moves Lower 229
Short Collars 234
Opening Position—Regular Collar 235
Stock Moves Lower—Profit Collar 237
Contents ix
Introduction 259
Long Call 260
Protective Put—Stock Moves Higher 260
Protective Put—Stock Moves Lower 262
Call Replacement 264
Rolling into a Bull Call Spread—Stock Moves Higher 267
Rolling into a Bull Call Spread—Stock Moves Lower/Call Repair Strategy 269
Rolling into a Bear Call Spread 271
Short Stock 272
Rolling into a Synthetic Straddle 274
Rolling into a Calendar Spread 276
Rolling into a Ratio Spread 278
Stock Moves Lower—Call Repair Strategy 281
Short Call 285
Long Put 288
Protective Call 288
Underlying Stock Moves Lower 288
Underlying Stock Moves Higher 290
Put Replacement Therapy 292
Rolling into a Bear Put Spread 294
Underlying Stock Moves Lower 294
Underlying Stock Moves Higher—Put
Repair Strategy 295
Rolling into a Bull Put Spread 297
Long Stock/Synthetic Straddle 298
Put Calendar Spread 302
Put Ratio Spread 305
Underlying Stock Moves Lower 305
Underlying Stock Moves Higher—Put Repair Strategy 308
Short Put 311
x CONTENTS
Introduction 317
Bull Call Spreads/Bear Put Spreads 317
Protective Puts/Protective Calls 318
Bull Call Spread—Protective Put 318
Bull Call Spread—Protective Put Spread 320
Bear Put Spread—Protective Call 321
Bear Put Spread—Protective Call Spread 322
Convert to Ratio Spreads 323
Bull Call Spread—Stock Moves Higher 323
Bull Call Spread—Stock Moves Lower/Repair Strategy 326
Bear Put Spread—Stock Moves Lower 330
Bear Put Spread—Stock Moves Higher/Repair Strategy 332
Convert to Butterflies 336
Bull Call Spread 337
Bear Put Spread 338
Bear Call Spreads/Bull Put Spreads 340
Calendar Spreads 340
Call Calendar Spread 341
Stock Moves Higher—Rolling into a Bull Call Spread 341
Stock Moves Higher—Rolling into a Diagonal Ratio Spread 342
Stock Moves Lower—Rolling into a Lower Strike Bull Call Spread 343
Stock Moves Lower—Convert to a Calendar Strangle 344
Put Calendar Spread 345
Stock Moves Lower—Rolling into a Bear Put Spread 345
Stock Moves Lower—Rolling into a Diagonal Ratio Spread 345
Stock Moves Higher—Rolling into a Higher Strike Bear Put Spread 347
Stock Moves Higher—Rolling into a Calendar Strangle 348
Butterfly Spreads 348
Long Butterfly to Long Condor 348
Introduction 353
Long Straddle 353
Straps/Strips 354
Modified Straps/Strips 357
Calendar Straddle 359
Rolling a Long Straddle into an Iron Butterfly 361
Diagonal Iron Butterfly 363
Contents xi
Index 375
Preface to the
First Edition
xiii
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