Option Spread Strategies E-Book

Anthony J. Saliba

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Bloomberg Professional
• Sprache: Englisch

Seitenzahl: 365

Veröffentlichungsjahr: 2010

Beschreibung

Spread trading--trading complex, multi-leg structures--is the new frontier for the individual options trader. This book covers spread strategies, both of the limited-risk and unlimited-risk varieties, and how and when to use them. All eight of the multi-leg strategies are here: the covered-write, verticals, collars and reverse-collars, straddles and strangles, butterflies, calendar spreads, ratio spreads, and backspreads. Vocabulary, exercises and quizzes are included throughout the book to reinforce lessons. Saliba, Corona, and Johnson are the authors of Option Strategies for Directionless Markets.

Leseprobe

Table of Contents

Praise

Also by

Title Page

Copyright Page

Important Disclosures

Acknowledgements

Introduction

Chapter 1 - The Covered-Write

STRATEGY OVERVIEW

STRATEGY COMPOSITION

RISK MANAGEMENT: THE GREEKS OF THE COVERED-WRITE

THE GREEKS

INVESTMENT OBJECTIVES

STRATEGY COMPONENT SELECTION

TRADE MANAGEMENT

CHAPTER 1 EXERCISE

CHAPTER 1 QUIZ

Chapter 2 - Verticals

STRATEGY OVERVIEW

STRATEGY COMPOSITION

THE GREEKS OF THE VERTICAL SPREAD

INVESTMENT OBJECTIVES

STRATEGY COMPONENT SELECTION

TRADE MANAGEMENT

CHAPTER 2 EXERCISE

CHAPTER 2 QUIZ

Chapter 3 - Collars and Reverse-Collars

STRATEGY OVERVIEW

STRATEGY COMPOSITION

THE VOLATILITY COMPONENT OF A COLLAR OR REVERSE-COLLAR

THE COLLAR AND REVERSE-COLLAR AS HEDGING VEHICLES

THE GREEKS OF COLLAR AND REVERSE-COLLAR SPREADS

COLLARS AND REVERSE-COLLARS (HEDGED AGAINST UNDERLYING POSITIONS)

INVESTMENT OBJECTIVES

STRATEGY COMPONENT SELECTION

TRADE MANAGEMENT

CHAPTER 3 EXERCISE

CHAPTER 3 QUIZ

Chapter 4 - Straddles and Strangles

STRATEGY OVERVIEW

STRATEGY COMPOSITION

THE GREEKS OF STRADDLES AND STRANGLES

INVESTMENT OBJECTIVES

STRATEGY COMPONENT SELECTION

TRADE MANAGEMENT

RISK AND REWARD, THERE IS NO FREE LUNCH!

CHAPTER 4 EXERCISE

CHAPTER 4 QUIZ

Chapter 5 - Butterflies and Condors

STRATEGY OVERVIEW

STRATEGY COMPOSITION

THE GREEKS OF LONG BUTTERFLIES AND CONDORS

INVESTMENT OBJECTIVES

STRATEGY SELECTION

TRADE MANAGEMENT

CHAPTER 5 EXERCISE

CHAPTER 5 QUIZ

Chapter 6 - Calendar Spreads

STRATEGY OVERVIEW

STRATEGY COMPOSITION

THE GREEKS OF THE TIME SPREAD

INVESTMENT OBJECTIVES

STRATEGY COMPONENT SELECTION

TRADE MANAGEMENT

CHAPTER 6 EXERCISE

CHAPTER 6 QUIZ

Chapter 7 - Ratio Spreads

STRATEGY OVERVIEW

STRATEGY COMPOSITION

THE GREEKS OF RATIO SPREADS

INVESTMENT OBJECTIVES

STRATEGY SELECTION

TRADE MANAGEMENT

CHAPTER 7 EXERCISE

CHAPTER 7 QUIZ

Chapter 8 - Backspreads

STRATEGY OVERVIEW

STRATEGY COMPOSITION

THE GREEKS OF BACKSPREADS

INVESTMENT OBJECTIVES

STRATEGY SELECTION

TRADE MANAGEMENT

CHAPTER 8 EXERCISE

CHAPTER 8 QUIZ

Appendix

Index

About the Authors

About Bloomberg

PRAISE FOR

OPTION SPREAD STRATEGIES

Trading Up, Down, and Sideways Markets

by Anthony J. Saliba with Joseph C. Corona and Karen E. Johnson

“Must reading for any professional who wants to learn directly from one of the top leaders in the options industry.”

—LARRY CONNORS CEO, TradingMarkets.com

“An excellent guide for learning how to trade option spreads. Saliba offers in-depth discussions on how and when to employ these advanced strategies and how to manage the risk of each position.”

—PETER LIPSKI Trader, Pan Capital

“Options Spread Strategies: Trading Up, Down, and Sideways Markets is an invaluable addition to any market resource collection. The book concisely walks through the dynamics of spread strategies and helps guide the reader though the return and risk metrics of the trades. . . . This is a must-have book for anyone seriously undertaking options investing.”

—CHIP NORTON Managing Director of Research, Fortigent

Also by

ANTHONY J. SALIBA

with Joseph C. Corona and Karen E. Johnson

Option Strategies for Directionless Markets:Trading with Butterflies, Iron Butterflies, and Condors

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ATTENTION CORPORATIONS

This book is available for bulk purchase at special discounts. Special editions or chapter reprints can also be customized to specifications. For information, please e-mail Bloomberg Press, [email protected], Attention: Director of Special Markets or phone [phone].

© 2009 by International Trading Institute, Ltd. All rights reserved. Protected under the Berne Convention. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher except in the case of brief quotations embodied in critical articles and reviews. For information, please write: Permissions Department, Bloomberg Press, 731 Lexington Avenue, New York, NY 10022 or send an e-mail to [email protected].

BLOOMBERG, BLOOMBERG ANYWHERE, BLOOMBERG.COM, BLOOMBERG MARKET ESSENTIALS, Bloomberg Markets, BLOOMBERG NEWS, BLOOMBERG PRESS, BLOOMBERG PROFESSIONAL, BLOOMBERG RADIO, BLOOMBERG TELEVISION, and BLOOMBERG TRADEBOOK are trademarks and service marks of Bloomberg Finance L.P. (“BFLP”), a Delaware limited partnership, or its subsidiaries. The BLOOMBERG PROFESSIONAL service (the “BPS”) is owned and distributed locally by BFLP and its subsidiaries in all jurisdictions other than Argentina, Bermuda, China, India, Japan, and Korea (the “BLP Countries”). BFLP is a wholly-owned subsidiary of Bloomberg L.P. (“BLP”). BLP provides BFLP with all global marketing and operational support and service for these products and distributes the BPS either directly or through a non-BFLP subsidiary in the BLP Countries. All rights reserved.

This publication contains the authors’ opinions and is designed to provide accurate and authoritative information. It is sold with the understanding that the authors, publisher, and Bloomberg L.P. are not engaged in rendering legal, accounting, investment-planning, or other professional advice. The reader should seek the services of a qualified professional for such advice; the authors, publisher, and Bloomberg L.P. cannot be held responsible for any loss incurred as a result of specific investments or planning decisions made by the reader.

Library of Congress Cataloging-in-Publication Data

Saliba, Anthony J.

p. cm.

Includes index.

Summary: “Proven author Anthony Saliba provides step-by-step instructions for spread trading techniques for options traders. Saliba helps readers understand the nuances of each technique, when to employ each spread strategy, and how to adjust when market conditions change. This hands-on guide includes quizzes and a final exam to help readers test their comprehension”—Provided by publisher.

ISBN 978-1-57660-260-7 (alk. paper)

1. Stock options. 2. Options (Finance) I. Corona, Joseph C., 1957- II. Johnson, Karen E., 1967- III. Title.

HG6042.S245 2009

332.64’53—dc22

2008040986

Important Disclosures

Following are several important disclosures we are required to make according to the rules of the Chicago Board Options Exchange (CBOE), by which we are governed. We encourage you to read them.

• Prior to buying or selling an option, one must receive a copy of the booklet “Characteristics and Risks of Standardized Options.” Copies of this document are available at www.theocc.com/publications/risks/riskchap1.jsp or from International Trading Institute, Ltd., 311 South Wacker Dr., Suite 4700, Chicago, IL 60606.

• Options involve risk and are not suitable for all investors.

• In order to trade strategies discussed in this book, an individual must first have his account approved by a broker/dealer for that specific trading level.

• No statement in this book should be construed as a recommendation to purchase or sell a security or as an attempt to provide investment advice.

• Writers of uncovered calls or puts will be obligated to meet applicable margin requirements for certain option strategies discussed in this book.

• For transactions that involve buying and writing multiple options in combination, it may be impossible at times to simultaneously execute transactions in all of the options involved in the combination.

• There is increased risk exposure when you exercise or close out of one side of a combination while the other side of the trade remains outstanding.

• Because all option transactions have important tax considerations, you should consult a tax adviser as to how taxes will affect the outcome of contemplated options transactions.

• The examples in this book do not include commissions and other costs. Transaction costs may be significant, especially in option strategies calling for multiple purchases and sales of options, such as spreads and straddles.

• Most spread transactions must be done in a margin account.

• Supporting documentation for any claims and statistical information is available upon request by contacting International Trading Institute, Ltd., 311 South Wacker Dr., Suite 4700, Chicago, IL 60606.

Acknowledgments

Our goal with this book was to take a basic approach to teaching the intricacies of advanced option strategies so investors could successfully put them to use in their own portfolios. I wish to thank my coauthors, Karen Johnson and Joe Corona, for their diligent efforts on this project.

In addition, I wish to express my gratitude to several of our staff, including David Schmueck, Christopher Hausman, and Scott Mollner, for their proofreading and edits of the manuscript.

I would like to extend a special thank you to the staff at Bloomberg Press, including Stephen Isaacs, JoAnne Kanaval, and Judith Sjo-Gaber, and to Kelli Christiansen at bibliobibuli, all of whom were very helpful and patient throughout the process.

Lastly, I wish to thank my agent, Cynthia Zigmund, for presenting me with this opportunity.

Anthony J. Saliba Founder International Trading Institute

Introduction

The fact that listed option trading volumes are exploding is not news. As of May 1, 2008, volume is up approximately 41 percent over 2007, which was also a record year. Option volumes have grown at a rate of approximately 30 percent per year for the last four years, and have more than tripled since 2000.

The forces driving option growth are much larger than recent market volatility and the need to hedge risk—after all, much of the double-digit growth took place during the low-volatility years of 2003 through early 2007. Several forces have combined to give the individual investor greater access to the options markets and to help level the playing field for the individual and the professional options traders:

Technology—All exchanges are now fully or partially electronic. This has opened up access to the individual options trader, as brokers now supply front-end systems that offer direct connections to every exchange and tools to help analyze, execute, and manage position risk.

Commissions—Commission rates continue to plummet as brokers leverage technology and compete for business.

Number of viable exchanges—The number of options exchanges continues to defy predictions and grow. With the recent addition of the Nasdaq Options Market (NOM), the number has now reached seven. These exchanges are in competition for the business of individual investors, and fee reductions and other incentives are the result.

Educational resources—The number of entities dedicated to options education and training continues to increase, along with the number of investors utilizing their services. The exchanges, the Options Industry Council, brokers, and other private entities offer robust programs at low cost.

Tighter bid-ask spreads—Although it is having a large negative impact on institutional options traders, the penny pilot program is very beneficial to the smaller individual investor because it has tightened spreads in many popular names.

The bigger news in the U.S.-listed options market is the growth in the electronic trading of spreads. Behind the scenes the volume of trading of complex option structures has outpaced overall growth in options trading. This book is dedicated to the art (and science) of spread trading. A number of factors have contributed to the explosion in spread trading:

Electronic spread books—Currently the Chicago Board Options Exchange (CBOE) and the International Securities Exchange (ISE) offer electronic spread books (the Philadelphia Stock Exchange [PHLX] is not far behind). These electronic “complex order books” allow traders the potential to electronically enter and trade multileg spread orders of various strategies—all of which are covered in this book—without the risk of being “legged” (missing one side of the spread). Spreads also can be traded in penny increments even if their underlying options cannot.

Ease of entry and exit—These same electronic spread books are accessible through the same front-end systems offered by most brokers. (If a broker doesn’t offer direct access to the spread books, it is time to switch brokers.)

Portfolio-based margining—In the past, the margining of spreads sometimes made them economically unrealistic for many investors. The availability of portfolio-based margining at many brokers has made spread margining more realistic and affordable for many investors.

Limited-risk strategies—Spreads offer investors different ways to participate in market scenarios in a limited-risk fashion. Vertical spreads, butterflies, condors, and time spreads are all limited-risk strategies that the investor can use to address different market scenarios. (After the recent subprime meltdown, limiting risk has once again become fashionable.)

Spread trading is the new frontier for the individual options trader, and this frontier is opening up rapidly. This book is dedicated to spread strategies, both of the limited-risk and unlimited-risk varieties, and to how and when to use them.

1

The Covered-Write