To minimize risk and greatly increase return, lightning-fast options trading instincts are critical. All About Options, Second Edition is the ideal first step to developing these instincts. With its in-depth coverage of the basics of options and option trading, this new edition is perfect for beginners as well as traders going to the next level.
It provides:
Facts and figures updated from the first edition, with more on stock options;
Up-to-the-minute material on changes in the marketplace and technology;
In-depth explanations of options trading strategies from basic to complex.
Knowledgeable options trading is a key element of any effective strategy.
All About options is the clearest, easiest-to-follow guidebook today on the pros, cons, risks, and rewards of using options.
PREFACE
First, we need to address the following questions--
- What Are Options?
- Do They Have Economic Value?
- How Should an Investor Use Stock Options and Options-on-Futures?
- What Are the Pros and Cons, Risks and Rewards?
- Is Option Trading Gambling?
Options, in general, are the legal rights, acquired for a consideration,
to buy or sell something at a predetermined price by a certain time in
the future. Options are very common in real estate, for example.
Developers will take options on certain pieces of property as they plan
projects. It gives them time to obtain zoning approvals and capital for
development. The option locks in the price and buys time.
Real estate and most other options are negotiated from scratch by the
two, or more, parties involved. The buyer and seller need to agree on
all the terms or specifications, not to mention price. Reaching an
agreement may take anywhere from a few hours to several months.
Negotiations can break down, resulting in no agreement or option.
There is another type of option. It is called an exchange-traded option
and is the province of this book. This type of option differs from the
other in that all the specifications are prearranged, except price. For
stocks, options generally "cover" 100 shares of the underlying stock;
options-on-futures are on the underlying futures contract. All the other
specifications -- delivery date, place and type of delivery, quality,
etc. -- are clearly defined. The only variables are the number of
options to be bought or sold and the price.
Since buyers or sellers decide for themselves on quantity, the only
thing left to negotiate is price. It is this characteristic of
uniformity that makes the stock and futures exchanges possible. The
exchanges, in turn, render society in general, and the business world in
particular, a very important economic service -- the discovery of price.
Trading in options and the underlying stocks or futures contracts tells
users, planners, reporters, economists, speculators, investors,
government officials, and anyone else interested, the current value of a
company's stock or a commodity, along with projected price trends into
the future.
If you are a user or processor of soybeans, copper, money, or any one of
the over 60 options-on-futures traded in the United States, you can
easily check the futures market to obtain the current price and get a
good insight into what prices are expected to be 3, 6, or 12 months from
now. A look at any of the thousands of stock option prices tells you
what savvy traders think about the prospects of individual stocks. Or
you might study one of the many composite indexes of stocks,
commodities, utilities, foreign currencies, etc. (or the options on
these indexes), to get a feel for the price direction of an entire
market.
Another possibility might be that your analysis indicates you are facing
some serious financial risks. Options could provide some relief. This is
the second very important function of the options markets. Coupled with
risk management is the ease and convenience of buying and selling
options.
Let me give you an example. You own a quantity of something. It could be
an agricultural product (grains, livestock) or a financial entity (a
stock portfolio, Treasury bonds). Analysis of the price trend indicates
that the commodity you own could lose value over the next 6 months.
Thomas A. McCafferty's involvement in the cash commodities, futures, and
securities industries goes back to 1973. He has traded stocks, futures,
and options for his own account and for others and has supervised
brokers who traded for the public. Additionally, he has a strong
background in sales and marketing and is the author of
In-House
Telemarketing: A Master Plan for Starting and Managing a Profitable
Telemarketing Program (2nd edition, 1992). Other financial books
written or coauthored by him include
Winning with Managed Futures,
All about Futures, and
All about Commodities.Mr. McCafferty, as a branch office manager for Securities Corporation of
Iowa, was registered as a futures broker, a securities broker, a
securities and option principal, and an insurance broker. He has also
been a real estate broker, a member of the marketing faculty of Upper
Iowa University, and a consultant for the Small Business Administration.
He lives and writes in Denver, Colorado. Mr. McCafferty is currently
working on a book and a newsletter on scale trading selected commodity
markets.
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