Getting Started in Advanced Options

Book Preface

Every investor and trader wants to combine several attributes in the stock portfolio: diversification, leverage, safety, and profitability.

This is a big order. How can you create all of these elements in the same portfolio? Tradition advises that if you want profits, you have to give up safety, and that if you want to use leverage, you have to take on greater risk.

In this book, these traditional problems are challenged by demonstrating how to combine the desirable attributes while managing and even eliminating the undesirable ones.

Options, once reserved for speculators and those able to tolerate high risk, have become mainstream devices for portfolio management. Many advanced option strategies can be applied so that risks are held down or even hedged entirely, while even conservative investors may create profits by combining options with stock positions.

Can options be used in a conservative manner? Yes; in fact, one of the best aspects to this market is that it can be designed to fit a range of risk tolerance profiles. The highly conservative investor may use options to reduce risk in long stock positions. On the far end of the spectrum, the speculator can continue to use options to swing trade, leverage, and seek fast profits. The range of strategies covers the entire risk spectrum.

This book presents a range of advanced strategies. It demonstrates how market volatility works as an advantage when options are properly used to profit from uncertainty. Spreads and straddles provide the means for designing an options portfolio to accomplish many goals. These include creation of a small but consistent profit potential in exchange for equally limited risk exposure.

The later chapters in the book examine some very interesting option strategies for even greater profits than those available from option trading on equities. Options on futures are very exciting; since futures are leveraged instruments already, options on futures are “leverage on leverage.” Trading options is much safer than trading directly in futures, however. Just as trading options on stocks is cheaper and often safer than trading shares directly, you can trade options on futures directly or through commodities-based exchange-traded funds (ETFs) or index funds. This market opens up many possibilities for large profits, while limiting risks to the relatively low cost of the option.

Index options are equally exciting. An index provides built-in diversification and broad exposure, in comparison to the very limited diversification available when you trade shares.