The Unlucky Investor's Guide to Options Trading

Julia Spina

• Publisher: Wiley
• Year: 2022
• Print ISBN: 9781394278060, 9781119882657
• eBook ISBN: 9781119882664
• Edition: 1
• Topic: Business
• Subtopic: Trading
• Index: Business

An approachable guide to sustainable options trading, minimal luck needed.

Traders who are successful long-term do not rely on luck, but rather their ability to adapt, strategize, and utilize available tools and information. Modern markets are becoming increasingly accessible to the average consumer, and the emergence of retail options trading is opening a world of opportunities for the individual investor. Options are highly versatile and complex financial instruments that were exclusive to industry professionals until recently. So where should beginners start? The Unlucky Investor's Guide to Options Trading breaks down the science of options trading to suit interested traders from any background. Using statistics and historical options data, readers will develop an intuitive understanding of the potential risks and rewards of options contracts. From the basics of options trading to strategy construction and portfolio management, The Unlucky Investor's Guide to Options Trading guides readers through the world of options and teaches the crucial risk management techniques for sustainable investing.

Chapter 1
Math and Finance Preliminaries

The purpose of this book is to provide a qualitative framework for options investing based on a quantitative analysis of financial data and theory. Mathematics plays a crucial role when developing this framework, but it is predominantly a means to an end. This chapter therefore includes a brief overview of the prerequisite math and financial concepts required to understand this book. Because this isn't in‐depth coverage of the following topics, we encourage you to explore the supplemental texts listed in the references section for those mathematically inclined. Formulae and their descriptions are included in several sections for reference, but they are not necessary to follow the remainder of the book.

Stocks, Exchange‐Traded Funds, and Options

From swaptions to non‐fungible tokens (NFTs), new instruments and opportunities frequently emerge as markets evolve. By the time this book reaches the shelf, the financial landscape and the instruments occupying it may be very different from when it was written. Rather than focus on a wide range of instruments, this book discusses fundamental trading concepts using a small selection of asset classes (stocks, exchange‐traded funds, and options) to formulate examples.

A share of stock is a security that represents a fraction of ownership of a corporation. Stock shares are normally issued by the corporation as a source of funding, and these instruments are usually publicly traded on stock exchanges, such as the New York Stock Exchange (NYSE) and the Nasdaq. Shareholders are entitled to a fraction of the company's assets and profits based on the proportion of shares they own relative to the number of outstanding shares.

An exchange‐traded fund (ETF) is a basket of securities, such as stocks, bonds, or commodities. Like stocks, shares of ETFs are traded publicly on stock exchanges. Similar to mutual funds, these instruments represent a fraction of ownership of a diversified portfolio that is usually managed professionally. These assets track aspects of the market such as an index, sector, industry, or commodity. For example, SPDR S&P 500 (SPY) is a market index ETF tracking the S&P 500, Energy Select Sector SPDR Fund (XLE) is a sector ETF tracking the energy sector, and SPDR Gold Trust (GLD) is a commodity ETF tracking gold. ETFs are typically much cheaper to trade than the individual assets in an ETF portfolio and are inherently diversified. For instance, a share of stock for an energy company is subject to company‐specific risk factors, while a share of an energy ETF is diversified over several energy companies.

When assessing the price dynamics of a stock or ETF and comparing the dynamics of different assets, it is common to convert price information into returns. The return of a stock is the amount the stock price increased or decreased as a proportion of its value rather than a dollar amount. Returns can be scaled over any time frame (daily, monthly, annual), with calculations typically calling for daily returns. The two most common types of returns are simple returns, represented as a percentage and calculated using Equation (1.1), and log returns, calculated using Equation (1.2). The logarithm's mathematical definition and properties are covered in the appendix for those interested, but that information is not necessary to know to follow the remainder of the book.

(1.1)

(1.2)

where

is the price of the asset on day

and

is the price of the asset the prior day. For example, an asset priced at $100 on day 1 and $101 on day 2 has a simple daily return of 0.01 (1%) and a log retu...

Table of contents

• Cover
• Table of Contents
• Title Page
• Copyright
• Dedication
• Foreword
• Preface
• Acknowledgments
• About the Authors
• Introduction: Why Trade Options?
• Chapter 1: Math and Finance Preliminaries
• Chapter 2: The Nature of Volatility Trading and Implied Volatility
• Chapter 3: Trading Short Premium
• Chapter 4: Buying Power Reduction
• Chapter 5: Constructing a Trade
• Chapter 6: Managing Trades
• Chapter 7: Basic Portfolio Management
• Chapter 8: Advanced Portfolio Management
• Chapter 9: Binary Events
• Chapter 10: Conclusion and Key Takeaways
• Appendix
• Glossary of Common Tickers, Acronyms, Variables, and Math Equations
• References
• Index
• End User License Agreement