The Option Strategy Desk Reference

An Essential Reference for Option Traders

Russell A. Stultz

• Publisher: Business Expert Press
• Year: 2019
• Print ISBN: 9781949443905
• eBook ISBN: 9781949443912
• Topic: Business
• Subtopic: Trading
• Index: Business

This book contains 78 option trading strategies, which provides readers with an option toolbox that fits every market condition, i.e., bullish, neutral, or bearish.

Options are the fastest growing trading venue offered today. Option trading volume grew 22% in 2018 alone—faster than any other trading venue. Why? Because traders are learning how options are statistically predictable and orderly. And they provide extensive financial leverage and strategic flexibility. When compared to buying and selling stock, futures, or foreign exchange currency pairs, it's not even a contest!

For just a few hundred dollars, an option trader can control tens of thousands of dollars' worth of stock, ETF shares, a financial index, or futures contracts. And options offer dozens of trading strategies designed to exploit current market conditions. This book contains 78 option trading strategies, which provides readers with an option toolbox that fits every market condition, i.e., bullish, neutral, or bearish. No other financial instrument offers this flexibility and no other trading venue can provide the same steady financial return week in and week out.

Glossary

Alert. A trader-established notification based on a preset value sent to inform the trader by e-mail and/or text messaging when a specified condition occurs. For example, if the price of the underlying security pierces an established price, the trader receives an alert for either information or in order to take action.

Ask Price. The buying price, or option premium, in dollars and cents, to be paid for each share of the underlying optionable security within an option contract (most often 100 shares per option contract). When trading shares of stock, ask is used to sell and bid is used to buy.

At the money (ATM). An option strike price (or exercise price) that is closest to the current price of the underlying optionable security.

Backwardation (or Normal Backwardation). See Contango.

Base or Basing. A term used to describe a sideways movement on a price chart. Rally, base, and drop describe a sequence of upward, sideways, and downward price moves.

Bearish. A negative bias held by a trader who expects a security or market to decline in value.

Bearish Spread. An option spread designed to be profitable if the underlying security declines in price. A common bearish spread consists of buying an in-the-money put and selling an out-of-the money put. This is called a bear put spread.

Beta. A measure of how closely the movement of the market price of a stock corresponds to the movement of the financial index to which it belongs. For example, the beta value of AAPL stock is a comparison to its market price volatility to that of the S&P 500 financial index.

Bid Price. Option sell orders are initiated using the Bid cell on the selected strike price row of an option chain. The default price is the Mark, which is midway between the Bid and Ask prices.

Bid-to-Ask Spread. The difference in price between the Bid and Ask values on an option chain. An option chain’s Mark value is midway between the Bid and Ask values. Narrow bid-to-ask spreads reflect brisk trading activity and minimize slippage in the premium paid or received for a trade.

Bracketed Trade. A trade that includes a limit entry, a protective stop, and a profit target. Typically used when buying shares of stock or exchange-traded funds (ETFs).

Breakout. As applied to market price, a breakout refers to a strong price rally or drop. Traders look for entry opportunities when their analysis signals a possible price breakout.

Brokerage Account. An account held by the client of a brokerage firm that includes securities and cash. The value of the account may be used as collateral (or margin) to finance the purchase of stocks, options, futures contracts, and other marketable securities.

Bullish. A positive bias held by a trader who expects a security or market to increase in value.

Bullish Spread. An option spread designed to be profitable if the underlying security rises in price. A common bullish spread consists of buying an at-the-money call and selling an out-of-the money call. This spread is called a bull call spread.

Buy-to-Close Order. A buy order placed by an option trader who originally sold one or more option contracts. The buy-to-close order requires the option trader to pay premium to close an active position.

Calendar (or Time Spread). An option spread created by selling one option and buying another on the same security. The option sold expires sooner than the option bought. This spread is named calendar spread because the two contracts have different expiration dates. The goal of a calendar spread is to receive more income from the sold option compared with the option that is purchased. If sufficient time remains in the option bought, another option may be sold for additional premium income.

Call. A call option contract entitles the buyer to acquire (or “call away”) 100 shares per contract of the underlying security from the seller, who is contractually obligated to deliver the stock to the buyer. Of course, this transaction must occur prior to contract expiration.

Call Option. Option traders buy and sell call options. Call option buyers favor an increase in option values, called premium, when the price of the underlying equity increases in market value. This increase permits call option buyers to sell the options for more than originally paid. Call option sellers favor a decrease in premium values, the passage of time, and a drop in trading volatility, all of which reduce premium values. The drop in premium value permits option sellers to close their trade for profit by buying-to-close their call options for less than they paid. Call option premium values decline as the price of the underlying equity drops in market value. Equities include stocks, ETFs, financial indexes, or ­futures contracts. The passage of time decreases the value of options. High trading ­volatility increases option premium values, while declining volatility decreases option premium values.

Called Away. The buyer of a call option may call the optioned security away from the seller if the option becomes in the money (ITM) by one cent. (See in the money.) The seller must deliver the stock to the buyer, who must pay the seller the option price. If the seller does not own the called stock, he or she must purchase and deliver the stock to the buyer for a loss.

Candlestick Chart. A price chart that uses red and green rectangles that resemble the bodies of candles. The candles have lines above and below, called shadows or wicks. The bottom and top of each candle body represents the opening and closing price for the selected time interval, that is, week, day, hour, and so on. A green candle body represents a rally (a higher closing price than that of the opening price). Red candle bodies represent a drop candle, that is, a lower closing price than the opening price.

Cash Settlement Option. Option contracts on financial indexes are cash settled rather than stock settled. In the case of either a call or a put, the seller must pay the buyer the difference between the option price and the current ITM price.

Chart Interval. Any of several chart time intervals used on price charts. Examples are weekly, daily, hourly, and minute charts. Most traders look across several time intervals to determine the characteristics of price movements across time. Experienced chart analysts use candlestick charts beginning with weekly intervals and working their way to shorter time intervals to develop an understanding of price characteristics. Chart studies are often applied to enhance a trader’s expectation relative to future price movements.

Chart Study. A mathematical indicator used on security price charts to show price averages, overbought/oversold conditions, trading volume, average price movements, and much more.

Chicago Board of Exchange (CBOE). The company responsible for providing live options data used by client brokerages throughout the world.

Closeout Date. A predetermined date upon which a contract should be closed to preserve the value that remains within an option position.

Closing Price. The final price at which a security traded at the end of the trading day. When applied to an option contract, this is the premium paid or received when a buy-to-close or sell-to-close transaction is processed.

Closing Purchase. A buy-to-close transaction conducted by the holder of a short option (the option writer) to liquidate an option position.

Closing Sale. A sell-to-close transaction conducted by the holder of a long option (the option buyer) to liquidate an option position.

Contango. This is a term related to a comparison between the spot price of a future and the current contract price. Some option traders borrow and misapply the term, in spite of the fact that options do not have spot prices. When the price of an option or futures contract is either rising or falling in value, it is said ...

Table of contents

• Cover
• Half Title Page
• Title Page
• Copyright
• Advanced Quotes for The Option Strategy Desk Reference
• Contents
• Preface
• Disclaimer
• Acknowledgments
• Introduction
• Short Call
• Long Call
• Short Put
• Long Put
• Covered Call
• Bull Call
• Bull Put
• Horizontal Bull Call Diagonal
• Bear Put Vertical
• Calendar Bull Call
• Calendar Bull Put
• Diagonal Bull Call
• Diagonal Bull Put
• Calendar Straddle
• Neutral Calendar Call Straddle
• Iron Condor
• Jade Lizard
• Twisted Sister
• Reverse Iron Condor
• Condor
• Short Condor
• Short Strangle
• Long Strangle
• Covered Short Strangle
• Long Guts Strangle
• Short Straddle
• Long Straddle
• Strap
• Strip
• Call Ratio Spread
• Put Ratio Spread
• Diagonal Call Ratio Spread
• Diagonal Put Ratio Spread
• Equity Collar
• Protective Call
• Long Call Butterfly (Balanced)
• Short Call Butterfly (Balanced)
• Long Put Butterfly (Balanced)
• Short Put Butterfly (Balanced)
• Long Call Butterfly (Unbalanced)
• Short Call Butterfly (Unbalanced)
• Long Put Butterfly (Unbalanced)
• Short Put Butterfly (Unbalanced)
• Broken Wing Long Call Butterfly
• Broken Wing Short Call Butterfly
• Broken Wing Long Put Butterfly
• Broken Wing Short Put Butterfly
• Broken Wing Long Call Butterfly (Unbalanced)
• 2-Step Long Call Butterfly
• 2-Step Short Call Butterfly
• 2-Step Long Put Butterfly
• 2-Step Short Put Butterfly
• Double Butterfly
• Iron Butterfly
• Reverse Iron Butterfly
• Long Call LEAPS (Long-Term Equity Anticipation Securities)
• Long Put LEAPS (Long-Term Equity Anticipation Securities)
• Put Backspread
• Ratio Call Write
• Ratio Put Write
• Variable Ratio Call Write
• Long Call Ladder
• Short Call Ladder
• Long Put Ladder
• Short Put Ladder
• Long Box
• Short Box
• Synthetic Long Stock
• Synthetic Long Stock Combo
• Synthetic Short Stock
• Synthetic Long Call
• Synthetic Long Put
• Synthetic Short Call
• Synthetic Short Put
• Synthetic Short Stock (Split Strikes)
• Long Call Synthetic Straddle
• Short Call Synthetic Straddle
• Long Put Synthetic Straddle
• Short Put Synthetic Straddle
• Glossary
• About the Author
• Index