Free EBook Samples: Free ebook sample of "What About Options? - A Prelude to Profitable Options Trading" by B P Terence TEO (powered by Smashwords)

No part of this publication may be reproduced in any media or form without the expressed permission of the author in writing. Requests should be made to the author whose email is located at the epilogue section.

This publication is designed to provide accurate and introductory information in regard the subject matter covered. It is made available with the understanding that the publisher/author is not engaged in rendering professional and/or financial services. If professional or financial advice is required, the services of a competent financial/professional person should be sought.

The publisher/author is entirely not liable for any damages arising from the use of the information in this book.

Smashwords License Statement
This ebook is licensed for your personal enjoyment only. This ebook may not be re-sold or given away to other people. If you would like to share this book with another person, please purchase an additional copy for each reader. If you’re reading this book and did not purchase it, or it was not purchased for your use only, then please return to Smashwords.com and purchase your own copy. Thank you for respecting the hard work of this author

[Back to TOC]

PREFACE
<><><>

"What About Options? - A Prelude to Profitable Options Trading" is written specifically for the beginner who wants a concise and wholesome understanding of options and how to correctly employ this financial instrument profitably.

Over the last 20 years, I have accumulated a wide range of investment and trading experiences on equities, options, futures, forex and commodities in both the US and Asian markets. Offering this book to interested readers and option students is my way of giving back to society, the knowledge on options that I first gained from others who shared with me previously; the authors, peers and colleagues. For this reason, this book is made available economically.

It is also written empathically for the beginning option students who understandably are often confused by this topic. As such, I have expensed effort to ensure option terminologies are precisely explained, so as to prevent jargon from discouraging the learning process or dampening the interest in this subject.

One of the objectives of this book is to demystify options and assist option students in getting over the resistances to learn this financial instrument. To achieve this, the contents may appear to be overly simplified, but I assure you that the simplest of things are sometimes the hardest to explain.

My sincere advice to all serious option students is not to overlook the fundamentals of options, which are the building blocks to comprehending complex option strategies. It is best to adopt a healthy attitude towards this continuous learning process, which entails constant reading and researching parties.

Enjoy this journey in discovering about options.

Thank you for reading.

~ Author - TEO B P Terence

[Back to TOC]

OPTIONS IN A NUTSHELL
<><><>

What are Options?
Fundamentally, an option is either a Call or a Put. It is a financial derivative and options are used as a financial instrument to generate and/or protect wealth or hedge against risks.

An option transaction could be as mundane as you agreeing to buy the used iPad from a friend by this weekend and paying a small deposit to reserve the item while you gather up enough cash for the purchase.

Such a deposit paid, called an option fee, is exchanged for the right to purchase an asset at an agreed price by a certain time. This specific form of option is known as a CALL Option.

Thus to the BUYER(you) of the CALL Option:
It is the contractual right, but not the obligation, to buy an asset at a predetermined price, at any time before or on expiration date.

And to the SELLER(your friend) of the CALL Option:
It is the contractual obligation, and with no right to refuse, on demand to sell an asset at a predetermined price, at any time before or on expiration date.

What about Put options?
Wind back time and we are now just 2 weeks away from the launch of iPad2. You currently own an iPad (the first version) and are considering upgrading to iPad2, but you want to examine the newer version physically after its launch before you decide. So, you approach a close friend and agreed on the following proposition:
1) you pay your friend $20 now
2) in exchange for accepting the $20, he must purchase your iPad at $200, if you choose to sell it to him within a 3 week period.

In this transaction, you would have been a BUYER of a PUT Option and the friend would be a SELLER of that PUT Option.

To you, a BUYER of a PUT Option:
It is your contractual right, but not obligation, to sell your iPad at $200, on or before the expiration of that option, which is 3 weeks from now.

To your friend, a SELLER of a PUT Option:
It is the contractual obligation, with no right to refuse, if you so demand, to buy your iPad at $200, on or before the expiration of that option.

Call and Put options are sold and bought in many Stocks and Commodities Exchanges all over the world, such as the New York Stock Exchange(NYSE), Chicago Board of Exchange(CBOE), Chicago Mercantile Exchange(CME), NYSE ARCA, Philadelphia Exchange(PHLX), BATS Global Exchange, and many others.

What are Option Strategies?
When individual Call and/or Put options, known as vanilla options, are combined in some specific manner, they become Option Strategies. Some popular option strategies are Call and Put Spreads, Butterflies, Ratios, Condors, Straddles, Strangles, Ladders, Iron Condors, etc.

Classifications of Options
Today, there are options created for a myriad of underlying assets. There are options on Citibank shares(equities), options on gold and silver(precious metals), options on wheat(grains), options on SP500 index(indexes), options on light sweet crude(commodities), options on interest rates(known as swaptions), options on currencies(forex), and even options on options.

Options are also classified either as American or European style.

A European option may be exercised only at the option expiry date, i.e. at a single pre-defined point in time and not any earlier.

An American option may be exercised at any time before and up to the option expiration date.

Expiration Date
All options have expiration dates, some as soon as a day and others within a week, a month, months or a year, and still other options can possess specifically tailored expiration dates years ahead. They all eventually expire. On expiration date, some options will be worth substantial amounts of money while others will be worthless.

Very long dated options are commonly referred to as Long Term Equities Anticipation Securities (LEAPS). Most retail investors do not usually participate in LEAPS

The widely traded options on equities, with monthly expirations, expire on the 3rd Friday of that indicated month. Seldom do option traders carry their option positions into expiration date. Most will liquidate them in advance, unless they intentionally want to possess the underlying stock or have them sold away.

Option Strike Price
Every option bears a Strike Price. This strike price is the agreed price between the buyer and seller of the option at which to transact that underlying asset($200 for that iPad).

Option Contract Size
ONE contract of Call or Put option gives the option trader the ability to transact 100 shares of the underlying equity.

Option Premium/Fee
Every option has a price at which it is bought or sold, known as an option premium. The total amount of premium paid on options is the option fee.

Option Value
Options derive its premium as a function of the following six variables:

Option Value = f (Equity spot price, Strike Price, Time to Expiration, Implied Volatility, “Risk Free” Interest Rate and Dividend Payout)

Option Greeks
Understanding option Greeks, is by far, for most students, one of the most challenging aspects of learning options. This is also usually the stage at which many tend to give up due to the perceived complexity.

Technically, option Greeks are a set of parameters assigned to each option that change the option values under specific circumstances, such as with the passing of time or when the underlying equity price moves. The amount of changes to option values are determined by the sensitivity of Delta(Δ), Gamma(Γ), Theta(Θ), Vega(ν) and Rho(ρ), which are the common, but not exhaustive list of, option Greeks.

These in a tiny nutshell are what define the fundamental aspects of exchange traded options.

[Back to TOC]

BASIC CALLs & PUTs
<><><>

Call and Put options have been defined.
In this section, we shall focus on how and why traders buy or sell, Call or Put options.

Buying an option establishes a LONG option position and selling an option, SHORT option trade, like so:

Buy a Call option = LONG Call position
Sell a Call option = SHORT Call position
Buy a Put option = LONG Put position
Sell a Put option = SHORT Put option

CALL OPTION
Traders establish LONG or SHORT Call positions to execute their trade opinion.

If a trader believes that the underlying asset price will rise, he could buy a Call option; ie., establish a LONG Call position. onversely, if he believes that the asset price will not rise beyond a certain level, he could sell its Call option; ie., establish a SHORT Call position.

Purchase this book or download sample versions for your ebook reader.
(Pages 1-5 show above.)