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Sherbin Al. How to Price and Trade Options
Introduction
CHAPTER 1. Why Trade Options?
CHAPTER 2. What to Look for in a Broker
CHAPTER 3. Building the Foundation
CHAPTER 4. Trade Probabilities: What to Look For
CHAPTER 5. Choosing Your Trades
CHAPTER 6. Choosing a Strategy
CHAPTER 7. Exiting Trades
CHAPTER 8. Executing Your Trades
CHAPTER 9. Portfolio Management
Conclusion
About the Website
About the Author
WILEY END USER LICENSE AGREEMENT
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As I always teach my children, any project worth doing is worth doing well. With respect to this book, if in the end it is judged to be done well, it is only through the efforts of many whose names do not appear on the cover.
First, I would like to thank my friend and fellow author, Larry Shover, for both encouraging and inspiring me to write this book and for introducing me to Pamela Van Giessen of John Wiley & Sons and Stephen Isaacs of Bloomberg Press. Pamela, Stephen, and I conceived this book over some good coffee and excellent pastries. Stephen continued on as my support system throughout the process of writing the book, fielding (too) many confused phone calls and setting me back on the right path.
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Have you ever wished you could make money like insurance companies do? Rather than paying for insurance each month, you could figure out how to collect enough premiums over time to pay for the catastrophic events that might occur plus a bit extra (or a lot extra) as profit? Or are you content to pay those premiums so you do not have to worry about things, even if it proves to be a bad financial decision? Once again, as we have discussed, every trade is about transference of risk. When you buy an option, someone is taking on your risk and collecting a fee for their trouble (much like you buying insurance). More often than not, that seller will be the one profiting from the transaction (much like an insurance company). And that profit maxes out at the premium you paid (and they collected). But at times, you get to cash in on your policy in a big way. So, over time, who comes out ahead? The answer is a definite, unqualified “It depends!” Wouldn’t it be nice if you could figure out the probabilities of an event occurring and its cost beforehand? Just like an insurance company utilizes actuaries to calculate the probabilities and costs of losses and sets premiums accordingly, option sellers do the same thing! But you may feel like you will never be able to figure that out. The math is daunting and the concepts beyond reach. Thanks to some incredibly powerful and easy-to-use software provided free of charge by a good broker, it is actually pretty easy! Thus, if a trader feels the option is too cheap and that the expected value of the trade over time gives her a profit, she can buy it. And if she feels it is too expensive, she can sell it, take on someone else’s risk, and hope to profit from it (just like an insurance company). In essence, you can choose to be the insurance company or the insured, and switch roles at any time, based on your assessment at the time.
One of the most amazing qualities of options is that you can quantify the probability you have of making money on any given trade before you make it! That sure makes things easier, don’t you think? Although it is definitely a huge advantage, making money trading options is a bit more complicated than that. In fact there are at least three more major moving parts that we need to discuss. We will introduce the concepts here and drill down much deeper later.
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