Complete Guide to Option Strategies

MICHAEL D. MULLANEY has traded equity and futures options utilizing a broad range of strategies and instruments, including options on stocks, stock and bond ETFs, indexes, and stock index futures. Mullaney executes option buying and selling strategies but concentrates most of his efforts on writing far out-of-the-money options by using strategies that can profit in rising, declining, and sideways markets. Mullaney is a principal of a commodity trading advisor and a certified public accountant. He has been interviewed on national business radio, featured by national trading magazines, was formerly a partner at KPMG, vice president of a corporate tax department, instructor for a law school course, contributor to a book on taxation, and author of six articles on merger and acquisition issues. He can be contacted at mmullaney@miminvestments.com.

• Preface xvAcknowledgments xxPart One Learning the Fundamentals 1Chapter 1 Getting Ready to Trade 3Why Trade Options? 3Developing a Game Plan 4What Is an Option? 8Defining Key Terms 12Final Thoughts 17Chapter 2 Option Fundamentals 19Overview 19Opening and Closing Positions 19Option Buying 20Option Selling 22Spreads 26Bid/Ask Spread 26Option Chain 27Final Thoughts 28Chapter 3 What Determines an Option’s Price? 31Overview 31Factors Affecting Option Pricing 33Forecasting Option Prices 41Final Thoughts 43Chapter 4 Tools of the Trade — Greeks 45Overview: Greek Basics 45Position Greeks 54Converting an Option Chain to Greeks 55More on Delta 56Final Thoughts 62Chapter 5 Buying versus Selling 65Overview 65Comparing Long and Short Options 66Option Buying 69Option Selling 70Bullish versus Bearish 73Learning How to Roll 73Final Thoughts 76Chapter 6 Understanding Spread Terminology 77What Is a Spread? 77Spread Buying versus Selling 78Spread Strategy Summary 83Final Thoughts 86Part Two The Four Basic Option Strategies 87Chapter 7 Long Call 91Overview 91Strategy Examples 93Beyond the Basics 104Final Thoughts 107Chapter 8 Long Put 109Overview 109Strategy Examples 111Beyond the Basics 122Final Thoughts 124Chapter 9 Short Call 125Overview 125Strategy Examples 127Beyond the Basics 139Final Thoughts 140Chapter 10 Short Put 141Overview 141Strategy Examples 143Beyond the Basics 154Final Thoughts 157Part Three Spread Strategies 159Chapter 11 Vertical Spread 161Overview 161Strategy Examples 163Beyond the Basics 173Final Thoughts 177Chapter 12 Iron Condor 179Overview 179Strategy Examples 180Beyond the Basics 188Final Thoughts 189Chapter 13 Unbalanced Spreads 191Overview 191Strategy Examples 192Beyond the Basics 201Final Thoughts 202Chapter 14 Straddle and Strangle 205Overview 205Strategy Examples 207Beyond the Basics 218Final Thoughts 222Chapter 15 Butterfly Spread 223Overview 223Strategy Examples 226Beyond the Basics 238Final Thoughts 240Chapter 16 Condor Spread 243Overview 243Strategy Examples 246Beyond the Basics 258Final Thoughts 260Chapter 17 Calendar Spread 263Overview 263Strategy Examples 266Beyond the Basics 279Final Thoughts 283Chapter 18 Diagonal Spread 285Overview 285Strategy Examples 288Beyond the Basics 298Final Thoughts 299Chapter 19 Covered Call 301Overview 301Strategy Example 302Beyond the Basics 306Final Thoughts 310Chapter 20 Combination 313Overview 313Strategy Examples 316Beyond the Basics 321Final Thoughts 324Chapter 21 Collar 327Overview 327Strategy Example 329Beyond the Basics 332Final Thoughts 334Chapter 22 Covered Combination 335Overview 335Strategy Example 338Beyond the Basics 341Final Thoughts 342Part Four Comparing Underlying Instruments 343Chapter 23 Comparing Stocks, ETFs, Indexes, and Stock Index Futures 345Overview 345Size of Instrument 346Exercise and Assignment 347Margin 348Commission and Bid/Ask 349Taxes 351Final Thoughts 351Chapter 24 ETF Options 353Overview 353What Is an ETF? 353ETF Options 354Final Thoughts 362Chapter 25 Stock Index Options 363Overview 363What Is a Stock Index? 364Index Options 364Index Volatility Skew 370Index Time Decay 370Final Thoughts 371Chapter 26 Stock Index Futures Options 373Overview 373What Is a Futures Contract? 375Stock Index Futures Option 379Bonus Section 385Final Thoughts 389Part Five Advanced Topics 391Chapter 27 Assessing Volatility 393Overview 393Comparison of Implied Volatilities 398How to Compare Volatility 399Response to Changing Conditions 401Market Volatility Gauges 406Volatility Skew 407Delta-Neutral Volatility Trading 414Consider Trading Volatility Index Options 415Final Thoughts 416Chapter 28 Exercise and Assignment 417Overview 417American-Style Exercise 420European-Style Exercise 421Cash Settlement 422Automatic Exercise 423Spread Risks 425Likelihood of Exercise 427Assignment Risk 429Exercise and Assignment Procedures 430Final Thoughts 431Chapter 29 Risk Management 433Run It Like a Business 433Controlling Risk 438Final Thoughts 448Chapter 30 Margin 449Overview 449Stock, ETF, Index, and Futures Margin 450Comparing Margin 459Margin Planning 460Interest 462Cash Accounts and IRAs 462Final Thoughts 464Chapter 31 Placing an Order 465Overview 465Types of Option Orders 466Strategy: The Multistep Order 471Bid/Ask Spread 472Commissions 475Trading Platform 476Clearing of Trades 476Final Thoughts 476Chapter 32 Taxation of Options 479General Rules 479Option Taxation 480Tax Reduction for Broad-Based Index and Futures Options 482Internal Revenue Service Circular 230 Notice 485Final Thoughts 485Appendix A Strategies at a Glance—ETFs 487Bullish ETF Strategies 488Bearish ETF Strategies 492Trading outside a Range 497Trading inside a Range 499Appendix B Strategies at a Glance—Indexes 503Bullish Index Strategies 503Bearish Index Strategies 506Trading outside a Range 508Trading inside a Range 510Appendix C Strategies at a Glance—Stock Index Futures 515Bullish Stock Index Futures Strategies 515Bearish Stock Index Futures Strategies 519Trading outside a Range 523Trading inside a Range 525Glossary 529About the Author 543Index 545