by George Fontanills Trading Options FOR DUMmIES ‰ 01_241769 ffirs.qxp 2/22/08 3:06 PM Page iii 01_241769 ffirs.qxp 2/22/08 3:06 PM Page ii Trading Options FOR DUMmIES ‰ 01_241769 ffirs.qxp 2/22/08 3:06 PM Page i 01_241769 ffirs.qxp 2/22/08 3:06 PM Page ii by George Fontanills Trading Options FOR DUMmIES ‰ 01_241769 ffirs.qxp 2/22/08 3:06 PM Page iii Trading Options For Dummies ® Published by Wiley Publishing, Inc. 111 River St. Hoboken, NJ 07030-5774 www.wiley.com Copyright © 2008 by Wiley Publishing, Inc., Indianapolis, Indiana Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permit- ted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600. 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Library of Congress Control Number: 2008923121 ISBN: 978-0-470-24176-9 Manufactured in the United States of America 10 9 8 7 6 5 4 3 2 1 01_241769 ffirs.qxp 2/22/08 3:06 PM Page iv About the Author Since 1993, Optionetics has provided investment education services and trading tools to more than 250,000 people from over 50 countries. Every day, Optionetics helps traders navigate the markets and chart paths to financial security. In fact, it not only stands by its pledge to provide the highest quality investment education possible, but it also guarantees it. Optionetics high-profit, low-risk, low-stress strategies are based on over dozens of trading techniques perfected by master trader George Fontanills, founder of Optionetics. Avoiding overly theoretical or technically compli- cated material, Optionetics represents a practical, balanced approach to trading profitably in today’s markets. Optionetics diverse range of educa- tional offerings includes seminars, publications, workshops, CDs and DVDs, home-study materials, books, and software. Choose Optionetics for the premier educational resources and tools to help you become the successful trader you’ve always wanted to be. Visit www.optionetics.com for more information. 01_241769 ffirs.qxp 2/22/08 3:06 PM Page v 01_241769 ffirs.qxp 2/22/08 3:06 PM Page vi Dedication This book is dedicated to the students of Optionetics and the readers of this book who may follow in their footsteps. Author’s Acknowledgments Special thanks to Clare White, C.M.T., for all her hard work in creating an excellent options education tool. 01_241769 ffirs.qxp 2/22/08 3:06 PM Page vii Publisher’s Acknowledgments We’re proud of this book; please send us your comments through our Dummies online registration form located at www.dummies.com/register/. Some of the people who helped bring this book to market include the following: Acquisitions, Editorial, and Media Development Project Editor: Jennifer Connolly Acquisitions Editor: Stacy Kennedy Copy Editor: Jennifer Connolly Technical Editor: Noel Jameson Senior Editorial Manager: Jennifer Ehrlich Editorial Supervisor: Carmen Krikorian Editorial Assistants: Erin Calligan Mooney, Joe Niesen, Leeann Harney, and David Lutton Cartoons: Rich Tennant ( www.the5thwave.com) Composition Services Project Coordinator: Kristie Rees Layout and Graphics: Reuben W. Davis, Melissa K. Jester, Christine Williams Proofreaders: Jessica Kramer, Tricia Liebig Indexer: Potomac Indexing, LLC Publishing and Editorial for Consumer Dummies Diane Graves Steele, Vice President and Publisher, Consumer Dummies Joyce Pepple, Acquisitions Director, Consumer Dummies Kristin A. Cocks, Product Development Director, Consumer Dummies Michael Spring, Vice President and Publisher, Travel Kelly Regan, Editorial Director, Travel Publishing for Technology Dummies Andy Cummings, Vice President and Publisher, Dummies Technology/General User Composition Services Gerry Fahey, Vice President of Production Services Debbie Stailey, Director of Composition Services 01_241769 ffirs.qxp 2/22/08 3:06 PM Page viii [...]... Trader Needs to Know About Options 141 Chapter 9: Getting a Handle on Option Styles 143 Nailing Down Index Options .143 Getting to the nitty-gritty of indexes 143 Capitalizing on an index with options .146 Watching Out for Style Risk .148 American-style options 148 European-style options 149 Exercising Your Options American Style ... for Your Results 327 Don’t Stop Learning 328 Do Love the Game 329 Glossary 331 Index 345 xvii xviii Trading Options For Dummies Introduction W elcome to Trading Options For Dummies This book brings you option strategies for managing risk and navigating a variety of market conditions I truly believe that by taking care of risk first, profits will follow With that... associated with these contracts Part I provides foundational risk and reward information for you 3 4 Trading Options For Dummies Part II: Evaluating Markets, Sectors, and Strategies Trading options don’t begin by running out to buy a call or put It’s the culmination of your analysis on the markets, sectors, and the underlying security for your trade This part provides market assessment methods using breadth... foundational risk and reward information for you Chapter 1 Options Trading and Investing In This Chapter ᮣ Developing an appreciation for options ᮣ Using option analysis with any market approach ᮣ Focusing on limiting risk ᮣ Capitalizing on advanced techniques W hether you’re new to trading or an experienced investor, listed stock and index options are great vehicles for managing risk and growing your... that is the question 153 Exercising Your Options the Euro Way 154 Tracking index settlement (the “SET”) 154 Cashing in with exercise 155 Satisfying Option Obligations .156 American-style stock options 156 Expiring uninspiring options 158 European-style options 161 Breaking It Down: American-Style Index Options 161 Exercising rights 162... that focuses on options to help you find the information you need quickly Icons Used in This Book To supplement the topics discussed in Trading Options For Dummies, I’ve also added different comments aimed at reiterating core ideas and giving you some trading insight I use the following icons to point out these insights: When encountering this icon, you’ll find slightly more detail-oriented tools and... 17 xii Trading Options For Dummies Chapter 2: Introducing Options 19 Understanding Option Contracts .19 Getting a grasp on option basics 19 Comparing options to other securities .21 Uncovering an Option’s Value 22 Understanding options rights and obligations .23 Taking in some terminology 23 Accessing All Your Options ... your trading career I use throughout the book, especially in Chapters 4 and 10 through 17 which are strategy oriented Incorporating Options into Your Routine Understanding options and what drives their prices gives you an alternate view of the stock market In addition to sentiment information provided by option trading, the conditions you more thoroughly understand as an options Chapter 1: Options Trading. .. Recognizing option risks and rewards .12 Incorporating Options into Your Routine 12 Adding options to your analysis 13 Trying out investing and trading strategies 14 Putting Options to Work 14 Understanding option styles 15 Using options to limit your risk 15 Applying options to sector approaches 16 Using Options in Challenging Markets 16 Reducing your... 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 2 Trading Options For Dummies This book allows you to move from topic to topic in any order or serves as a start to finish guide for option trading Use . Fontanills Trading Options FOR DUMmIES ‰ 01_241769 ffirs.qxp 2/22/08 3:06 PM Page iii Trading Options For Dummies ® Published by Wiley Publishing, Inc. 111 River St. Hoboken, NJ 0703 0-5 774 www.wiley.com Copyright. by George Fontanills Trading Options FOR DUMmIES ‰ 01_241769 ffirs.qxp 2/22/08 3:06 PM Page iii 01_241769 ffirs.qxp 2/22/08 3:06 PM Page ii Trading Options FOR DUMmIES ‰ 01_241769 ffirs.qxp. 46256, 31 7-5 7 2-3 447, fax 31 7-5 7 2-4 355, or online at http:// www.wiley.com/go/permissions. Trademarks: Wiley, the Wiley Publishing logo, For Dummies, the Dummies Man logo, A Reference for the Rest