Trading Options For Dummies®, 2^nd Edition

      Published by: John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, www.wiley.com

      Copyright © 2015 by John Wiley & Sons, Inc., Hoboken, New Jersey

      Published simultaneously in Canada

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      Library of Congress Control Number: 2014954665

      ISBN 978-1-118-98263-1 (pbk); ISBN 978-1-118-98264-8 (ePub); ISBN 978-1-118-98265-5 (PDF)

      Introduction

      Welcome to Trading Options For Dummies, 2nd Edition!

      This book is about introducing you to option strategies for managing risk and navigating a variety of market conditions. It’s geared to managing risk first, with the knowledge that profits will follow. With that in mind, the approaches described focus on reducing potential losses from traditional stock positions and building an option strategy repertoire that allows you to maximize your chances of making sound trades whether the markets are moving up, down, or sideways. To incorporate the comprehensive steps required when trading, it also provides discussions on market and sector analysis, as well as things to look for when trying out a new strategy.

      An option contract is a unique security that comes with contract rights and obligations. When used correctly, an option contract strikes a balance between risk of loss, the amount of money you put at risk, and reward, providing you with leverage while still allowing you to reduce overall trade risk. Of course, there’s another side to that leverage, increased risk, which will be managed, which is the main reason you should take the time to read through this book carefully. You need to understand the risks and characteristics associated with these contracts.

      

When applying for options trading with your broker, the broker will send you the reference guide Characteristics and Risks of Standardized Options. This publication, written by the Options Clearing Corporation (OCC), must be distributed by brokers to their clients prior to allowing them to trade options. It describes option contract specifications, mechanics, and the risks associated with the security. Together, that publication and the one you’re reading right now help you to understand your risks and use options effectively.

      There are hundreds of trading titles out there, including those focusing on option strategies. This book focuses primarily on approaches aimed at managing risk – the consistent theme throughout. By setting it up this way, you can read about different topics while keeping that key objective in mind. So go ahead, jump around to areas that interest you most.

      This book can be read from cover to cover or used as a reference guide. Each strategy provided identifies risks and rewards associated with the position. It also identifies alternative strategies to consider for risk management, when applicable. There are a million ways to successfully trade the markets, but certain challenges are universal to all of them. Tools and techniques focused on addressing these challenges are also provided throughout.

      To make reading and understanding the world of options trading a bit easier, we’ve used some conventions to help you along the way:

      Here’s what we assume about you: