Spread Trading E-Book

Greg Jensen

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Trading Series
• Sprache: Englisch

Seitenzahl: 467

Veröffentlichungsjahr: 2009

Beschreibung

A proven,easy-to-understandmethod for makingmoney with options "If you've never invested in the stock market,this is the book for you. If you've been investingfor years . . . this is still the book for you. A fantastic introduction to options." --Jon "DOCTOR J" Najarian, Co-founder, OptionMonster.com Spread trading-the practice of combining optiontrades and adjusting them over time-is being used successfullyby more and more professional traders. In this book, Greg Jensenshows nonprofessionals the tremendous advantages thissafe and profitable method offers. In simple and precise terms, Spread Trading providesreaders with all the essential tools to begin trading options.It explains, in nine simple steps, the basics of puts, calls,strike prices, and spreads-assuming no prior knowledge onyour part-and tells how to profit no matter what the market does.The author has helped thousands of people achieve successimplementing this approach, and with Spread Trading, hecontinues to educate individuals on the benefits of trading thisway, showing you how to make money while reducing risk. Building his lessons around the entertaining story oftwo ordinary guys figuring out how to trade options with each other,Jensen offers more than dry formulas-he relates the sense andthe intuition of trading options in a way that is simple,methodical, and easy to follow.

Leseprobe

Table of Contents

Title Page

Dedication

Copyright Page

Acknowledgements

About the Author

Introduction

QUESTIONS YOU MIGHT HAVE ON YOUR MIND

ALL YOU NEED TO KNOW ABOUT THE STOCK MARKET BEFORE YOU READ THIS BOOK

STEP ONE - Understanding the Long and Short of “Call” Options in the Market

CHAPTER 1 - Lon and Shorty

CHAPTER 2 - Let’s Make a Deal

CHAPTER 3 - Trading Rights and Obligations

CHAPTER 4 - Some Key Terms . . . that Almost Make Sense!

CHAPTER 5 - Strike One . . .

CHAPTER 6 - Strike Two . . .

CHAPTER 7 - Time Travel

CHAPTER 8 - R&R and Time Travel for Lon

COST BASIS AND BREAKING EVEN

REWARD

RISK

CALLING OUT SHORTY’S SHARES

CHAPTER 9 - R&R and Time Travel for Shorty

REWARD

RISK

CHAPTER 10 - How Lon and Shorty Came Out on Their Deal

STEP TWO - Understanding the Long and Short of “Put” Options in the Market

CHAPTER 11 - Bulls, Bears, and Stags

CHAPTER 12 - The Put: Reaching a Different Trade of Rights and Obligations

CHAPTER 13 - Strike One . . .

CHAPTER 14 - Strike Two and Time Travel

CHAPTER 15 - R&R for Lon

COST BASIS

REWARD

RISK

CHAPTER 16 - R&R for Shorty

REWARD

RISK

CHAPTER 17 - The Big Picture . . . So Far

CHAPTER 18 - How Lon and Shorty Came Out on Their Deal

STEP THREE - Ramping Up the Possibilities

CHAPTER 19 - Did You Know that There Are a Lot of People Trading Options?

CHAPTER 20 - Did You Know You Can Actually Buy and Sell Your Options to Other People?

CHAPTER 21 - Did You Know You Can Vastly Increase Your Return on Investment?

CHAPTER 22 - Did You Know that You Never Want to “Make As Much Money As Possible”?

CHAPTER 23 - Best of All: Did You Know You Can Combine Option Instruments?

TRENDS

OPTION INSTRUMENTS: BASIC CHARACTERISTICS

STEP FOUR - Getting a Few Basics in Place

CHAPTER 24 - More Time Travel

CHAPTER 25 - What Is An Option Worth?

CHAPTER 26 - Strike Three

CHAPTER 27 - Choosing Stocks

FIVE KEY AREAS OF PERFORMANCE

INTRINSIC VALUE: IS THE COMPANY PRICED RIGHT?

LET SOMEONE ELSE CRUNCH THE NUMBERS FOR YOU

ADDITIONAL FACTORS IN CHOOSING STOCKS

CHAPTER 28 - Reading the Tea Leaves (1)

THE OVERALL MARKET

READING MARKET SENTIMENT

CHAPTER 29 - Reading the Tea Leaves (2): Stock Trends

TECHNICAL INDICATORS

SUPPORT AND RESISTANCE

CHAPTER 30 - Getting the Final Pieces in Place

SOME MECHANICS AND TERMINOLOGY IN OPTION TRADING

ASSIGNMENT

SIX WAYS THE DEAL COULD END

EXPIRATION

OPTION HIEROGLYPHICS

CHAPTER 31 - Fun, Fun, Fun!

TRACKING THE PERFORMANCE OF CALLS

TRACKING THE PERFORMANCE OF PUTS

STEP FIVE - Understanding Two Basic Option Trades

CHAPTER 32 - Insuring Your Investment

COST BASIS

REWARD

RISK

WHEN TO USE A PROTECTIVE PUT

PRIMARY EXIT

CHAPTER 33 - Shorty Heaven: Selling Your Way to Profits

COST BASIS AND RISK

REWARD

WHEN TO USE A COVERED CALL

PRIMARY EXITS

STEP SIX - Moving from Option Trading to Spread Trading

CHAPTER 34 - Trading in Surround Sound: The Fundamental Spread Trade

COST BASIS

RISK

REWARD

“SPREAD” TRADE

BALANCE OF RISK AND REWARD

WHEN TO USE A COLLAR TRADE

PRIMARY EXIT

CHAPTER 35 - The Two Basic Ways to Make Money in Spread Trading

THE RELATIONSHIP BETWEEN THE COLLAR AND OTHER SPREAD TRADES

STEP SEVEN - Understanding Bullish Spread Trades

CHAPTER 36 - The Bull Call

NET DEBIT AND RISK

REWARD

HOW PROFIT IS GENERATED

CHAPTER 37 - The Bull Put

NET CREDIT AND REWARD

RISK

CHAPTER 38 - Bull vs. Bull

STEP EIGHT - Understanding Bearish Spread Trades

CHAPTER 39 - The Bear Call

NET CREDIT AND REWARD

RISK

CHAPTER 40 - The Bear Put

NET DEBIT AND RISK

REWARD

CHAPTER 41 - Bear vs. Bear

STEP NINE - Getting Started

CHAPTER 42 - Lifting the Fog

RISK AND REWARD IN THE DEBIT SPREAD TRADES

RISK AND REWARD IN THE CREDIT SPREAD TRADES

CHAPTER 43 - The Launch

FOUR ELEMENTS OF PREPARATION

ATTITUDE

WHAT WE WISH

APPENDIX - Answers to End-of-Chapter Reviews

Index

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The Wiley Trading series features books by traders who have survived the market’s ever changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional, or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future.

For a list of available titles, visit our web site at www.WileyFinance.com.

To my friends and colleagues at Spread Trade Systems

Copyright © 2009 by Greg Jensen. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Jensen, Greg, 1973-Spread trading : an introduction to trading options in nine simple steps / Greg Jensen. p. cm.

Includes index.

eISBN : 978-0-470-48617-7

1. Stock options. 2. Options (Finance) I. Title.

HG6042.J46 2009

332.63’2283-dc22

2008052151

Screenshots courtesy of optionsXpress, Inc. © 2008; optionsXpress, Inc. is not affiliated with, does not endorse, is not endorsed by, does not sponsor, is not sponsored by, does not control, is not controlled by Greg Jensen. Screenshots and information contained therein are for educational and informational purposes only, and are not intended to constitute a recommendation by optionsXpress, Inc. to sell, buy, hold or otherwise act with respect to any financial product. Any symbols displayed therein are illustrative only and any information therein was believed to be reliable at the time that it was made available and may now be out of date. Both options and online trading have inherent risk and may not be suitable for all investors. Please read Characteristics and Risks of Standardized Options.

Acknowledgments

They told me I have to do this acknowledgments page. It’s for thanking people “without whom this book could not have been written.” (“Without whom”? Who talks like that?) Apparently, I’m supposed to thank a bunch of people who aren’t even the author.

Like my colleagues at Spread Trade Systems. Yeah, right. The only things I ever heard from them about this book were, “No, you can’t file a personal injury claim for writer’s cramp.” For this they deserve thanks?

I’m also (at least judging by other books) supposed to thank my wife for something like “endless support and patience.” But other than to threaten me every once in awhile, Heather didn’t lift a finger. I didn’t talk to her much about the book anyway because I’m in trouble with her. She says I never listen to what she says (or something like that—I don’t remember). So, sorry Heather; no thanks for you.

There’s also a rumor going around about a guy named Duane Boyce, who supposedly helped me out by doing little jobs like making the book something that could actually be read. Some people seem to think he deserves some “credit.” And Mrs. Kimberly White—who seemed like such a nice, amusing girl until we started talking about acknowledgments—I know she helped rewrite some parts, but, hey, she already got her thanks: she actually gets paid for what she does as an editor. It’s either acknowledgments or money, people.

Okay, so I stole jokes from Dave Barry, James Gordon (a law professor, no less), Joe Glenn, and George Durrant. But that’s their fault. If they didn’t want people to steal their jokes they never should have told them.

I do thank my golfing buddy, however, who helped me write this book by helping me shoot in the 70s. (He says if it ever gets hotter than that, I shouldn’t go out at all.) That gave me lots of time to write last summer. He of all people deserves the credit for this book. Thanks, Stu!

G.J.

About the Author

Greg Jensen is cofounder of Spread Trade Systems, an industry leader in investment education. A Registered Investment Advisor, Jensen earned his degree in business management, with an emphasis in finance, from Utah State University. Over the last decade, he has helped thousands learn how to prosper in the stock market through spread trading.

Introduction

If you’re brand new to the stock market, good. That’s why I’ve written this book—specifically to help you. I want to show you how to achieve phenomenal results in the stock market safely. I will assume you know nothing, and then walk you step-by-step all the way up to the best way of making money in the market known to man or beast.

What I’m talking about is “spread trading,” and it’s a form of “option trading.” If you’re not new to the stock market, but just new to these trades, that’s great, too. You’ll just go faster; you’ll run rather than walk.

So I’m assuming you have no training or experience in trading options and that you don’t really know what it is (in fact, if you have heard of it you’ve probably heard (1) that it’s advanced, and (2) that it’s risky), and you’re probably a little skeptical that any book can teach a communications major how to do it.

Probably most books couldn’t. Most books about the stock market are written by professional traders or college professors who’ve completely forgotten what it was like not to know anything. Trying to learn option trading from most experts is like trying to learn the tax code from an accountant: she’ll toss around big words that you’ve never heard of, while you nod your head periodically and hope you’re nodding in the right places. And if you ever actually muster up enough courage to ask what a particular term means, she’ll explain it to you using other terms you don’t understand. Eventually, you slink away and decide to devote your brainpower to something it can handle more easily, like eating pudding or watching Survivor XMVII: Some Island Somewhere. And you feel like you must be a real idiot if that accountant (who, you notice, was wearing mismatched socks) could understand all that and you couldn’t.

Well, that’s why I’ve written this book. I haven’t forgotten what it’s like not to know anything, what it’s like to start from scratch. I want to give you the basics of making money in the stock market, and I want to do it in a way that anyone can understand. (In other words, I’m going to explain everything very slowly to you, because that’s how my wife always explains things to me.) It’s the ultimate beginner’s guide to trading options.

So the good news is that you really can learn to trade options. In fact, I’ve made learning it so easy that I think my cocker spaniel could understand it. And that means that you really can learn to make money without fear. What you’ve heard about options being risky is true only of people who trade options wrong. (They’re people who want to succeed in the worst way . . . and mangling options was the worst way they could think of.) Done right, it’s the safest and best way to make money that I know of. It’s what I just mentioned: spread trading. In spread trading we make money while reducing risk. We can achieve phenomenal results and yet not be ruled by fear or greed all along the way. Instead of worrying all the time, we can actually sleep at night. Imagine.

The bad news is, you do have to read all 334 pages of this book to get started. That’s a lot of pages, I understand. Before you commit, you probably have some questions. I’ve tried to anticipate them.

QUESTIONS YOU MIGHT HAVE ON YOUR MIND

Question 1: Why spread trading and not just regular investing? If trading options like this is so advanced, and investing is simpler, shouldn’t I just do that?

Well, investing is simpler to explain, no doubt about it. Nobody needs to write a book to tell you to buy stocks when prices are low and sell them when they go high (although many have . . .). If I were writing such a book, I would call it “Buy Stocks Low and Sell Them High” and all the pages would be empty. But seriously, there actually are a lot of different ways to buy low and sell high, and you should know about them if you’re going to chicken out on reading this book. But you should also know that the reason there a lot of different ways to buy stocks low and sell them high is that . . . it’s hard to do, and therefore extremely risky.

If you want to invest long-term, for example, there’s only one way to know which companies will be strong for the next 20 years: travel forward in time and see which companies are still around. But if you stay put on the space-time continuum, past performance is the only thing you have to go on, and it’s not a sure thing. Better than putting your money in a savings account, maybe, but you could lose your nest egg if the unexpected happens. (Ever hear of Enron? Or Bear Stearns? Or Washington Mutual? Or Lehman Brothers?) And even if you diversify your holdings, economic changes can occur that cause the whole market to dive. (Ever hear of 2008? 2009?)

I hate to say it, but the quickest way to end up with a million dollars in this strategy is to start out with two million.

However, if you want to invest and trade your stocks on a short-term basis, everything depends on timing—buying and selling at the right time. Because you face risk constantly, you have to know what’s going on constantly. Literally. As I heard one such investor say, “If you can’t watch stocks all day long, you shouldn’t be in the market at all.”

I guess I’m out, then, because . . . sorry . . . I actually like to do other things with my day. I have a sign over my desk that says it all: EAT. SLEEP. FISH. That’s it. How could I do that if I did nothing but watch the market—ALL DAY LONG? I believe I make better returns than the adviser who said that, and I do more with my day to boot. I like that combination.

The problem, then, is not with the formula: buy low and sell high. That formula applies in all sorts of places, including in trading options. The problem is in thinking that simply buying and selling stocks is the best way to be in the market in the first place. It isn’t.

So I admit it takes preparation to be able to trade options effectively—to spread trade. But learning to do it is more than worth it. I don’t know about you, but I’d like to be able to make money no matter what the market does. And that’s the case with spread trading. Whether the market is up, down, sideways, or inside out, you can make money. It takes a few chapters to see how it works, but you’ll get there.

Question 2: Why do it on my own? Isn’t it safer and more productive to use a fund manager?

If you trade options the way I’m going to show you, you can do better than the professionals can because you can make money no matter what the market does, and your fund manager can’t.

The problem is that professional managers have to do what we talked about in Question 1: they try to time the market—diversify their holdings and then buy and sell here and there at the right time. Now it’s true that there are some financial geniuses out there, but there are others who just got lucky a few times—and how can you tell which is which? Not only that, but even when professional managers do get the timing right, they control too many shares to be very nimble with them; their investments and trades are so large that they’re kind of . . . well, clunky. Even worse, over time they rarely outperform the market by much—if they outperform it at all—because they are the market. They’re that big. When the market dives, they dive. And your money dives right along with them.

Here’s what I predict: once you learn to spread trade, your fund manager will want to invest with you.

Question 3: Come on. If spread trading is that easy, wouldn’t everybody be doing it?

Hey, I didn’t say it was easy. It’s definitely harder than falling off a horse. But it doesn’t take a genius or a particular kind of background or education to be able to understand the methods we’ll be talking about in this book.

Now I know that everybody has different strengths and weaknesses. We’re all different. Some people are intelligent; some are good looking. You’re probably more intelligent than I am, but I’m probably better looking than you. But neither is required to succeed at spread trading. (Also, even if I am better looking than you, that doesn’t mean I have it all. You should see my upper body. I once went to a gym to lift weights, but the laughter made it difficult to concentrate.)

Believe it or not, it is possible to figure out all those charts and understand all that lingo without multiple PhDs and the work ethic of a nerdy ant. You just need to be able to read English (one page at a time in the proper order), write words and numbers (spelling does not count), add, subtract, multiply, and divide. That’s it. That guy who struts around like a super genius because he made tons of money trading options? Yep. Everything he does requires about a fourth-grade education. The difference between you and him (besides personality, I hope) is that someone at some point taught him how to do it.

That’s what you need. Someone who’s willing to take you step by step and explain what’s going on. Sloooooooooowly. Someone who won’t get impatient just because you don’t have a particularly mathematical mind. Someone who doesn’t think you ought to get an accounting degree first. Someone like a guardian angel, or a fairy godmother, or, just maybe . . . me.

So, again, if you’re brand new to the stock market, that’s good. You’re the reason I’ve written this book. And if you’re just new to trading options, that’s good, too. You’ll just be able to go faster. Rest assured: by going slow, I’m not being condescending. (Condescending means talking down to people.) I’m just trying to help.

ALL YOU NEED TO KNOW ABOUT THE STOCK MARKET BEFORE YOU READ THIS BOOK

So it’s more than okay if you don’t know anything about the stock market. You’re the main person I’m writing to. And I can tell you everything you really need to know about the market in 10 bullet points. But make sure you read this, because the rest of the book assumes that you get these basics. Okay? Here goes:

• A small company usually begins when the owner gets a loan from a bank or money from investors (from an investment capital company or from his mom), which pays for the stuff he needs to get started. When he turns a profit, the bank or investors or family members get their money back, with interest. When a company starts to get big and successful, it needs a bunch more money—millions of dollars—to continue growing. Mom usually doesn’t have that kind of money. So the company will raise that money by selling pieces of ownership in the company. So people can actually pay money to literally own a certain (itty-bitty) percentage of the company. This little piece of ownership is a “share,” and we call the company a “stock.” If you buy a piece of ownership in a company, you are buying a share of stock. (See? I told you I would go slow.)

• The stock market is just what it sounds like: a market. A place where people get together to buy and sell, but instead of fresh produce, sausages, and old watches, they’re buying and selling shares of stock.

• And like everything else good and fun, the stock market is mostly controlled by the big guys. I call them Big Investor Guys, or BIGs for short. These are institutional investors—those professional money managers who are so confusing to talk to—who manage huge amounts of other people’s money, and who together can buy and sell 5, 20, or even 50 million shares every day on a single stock. You and I might buy and sell 100 shares, or maybe even 5,000, but nothing like the volume of the BIGs. We don’t have an impact on the market and its prices at all.

• Many companies are owned largely, if not almost entirely, by these institutional investors. There are a lot of BIGs, and they really are big.

• So let’s say you bought a share of stock in a company called For Purposes of Illustration, Inc. when it was new and relatively tiny. The BIGs are looking at financial information, profit reports, earnings estimates, trends in the economy, and so on, all day long. (This is what makes them so dry and humorless.) If a bunch of them look and see that For Purposes of Illustration, Inc. is growing and making lots of money—and if they conclude that it will continue to grow and make lots of money—they all want in. And like anything else, if a lot of people want in, and there’s a limited supply, those who already own shares have their pick of who they want to sell to—so they naturally sell to whomever offers the most money. That is, the price of the stock goes up. Now it’s worth more than you paid for it. And if you sell your stock while all this is happening, you will make money.

• Because the market is driven by people with huge amounts of money guessing how successful companies will be in the future, all of those things the BIGs look at are extremely important. Like quarterly earnings reports. These are the reports that tell the BIGs if companies are living up to the BIGs’ expectations of them. And it’s an ugly thing if they’re not. Nothing puts the BIGs in a selling mood faster than a disappointing earnings report. Individual investors can make a good guess about what the BIGs (and therefore the market) will do by looking at things like earnings reports and other financial data. Or they can lose a lot by missing some important information. So investors need to know about the economy and the stocks they have invested in, or they can lose their bananas.

• Now even apart from quarterly earnings, let’s say a bunch of BIGs look at all their trends, reports, economic indicators, Ouija boards, and so on, and begin to think that For Purposes of Illustration, Inc. is going to slow down in growth or even start losing profits. Well, they don’t want to be holding on to millions of its shares then. They put them up for sale, and if nobody else wants those shares either, they have to lower their asking price. That is, the price of the stock goes down. Depending on where you bought, if you try to sell your stock in this trend, you will probably lose money.

• As time goes by, the BIGs see that the price of For Purposes of Illustration, Inc. is getting nice and low. They see something in some report, or at the bottom of a teacup, that makes them think the company will recover. Then that stock looks like a real bargain. The BIGs start to buy it up, and now that more people are willing to buy it, the price goes up again. You get the idea. The trick is knowing when a stock price will go up and when it will go down, so you know when to buy and when to sell. (And, of course, you can’t for sure. Don’t you listen? But you can make informed guesses.)

• What most investors, and the BIGs, are all aiming for is to: (1) buy a stock at a low price, (2) hold on to it while the price is going up, (3) sell before the price goes back down, (4) take the profits, and (5) do it again.

• Obviously, just like Scrabble, people who get really into the market do all sorts of other complicated and nuanced things. But you don’t have to know all that to be able to play successfully. Just Buy Low and Sell High. The End.

Okay, so that’s the big picture. And about that second-to-last bullet point: that’s what everyone else is trying to do. It’s not what we’re going to do. We’re going to learn about trading options, and then we’re going to learn how to trade options in a particular way: we’re going to learn how to spread trade.

So that second-to-last bullet point? We’re going to do something better than that. Something more flexible. Something more profitable. And we’re going to do it in nine simple steps. All I’m going to do is tell you a story of two guys figuring out how to trade options with each other. You’ll learn as they learn. More than dry formulas, you’ll actually pick up the sense—the intuition—of trading options. Then, when these two guys are ready for help from experts (starting in Chapter 19), they’ll learn even more. A lot more. But they—and you—will still learn in a way that is simple, methodical, and intuitive. And in short steps. With frequent reviews. See, these guys are a lot like you, and they learn the way we all learn: in small, logical, bite-size pieces, with frequent opportunity to lock in what we’re learning.

Come along and see.

STEP ONE

Understanding the Long and Short of “Call” Options in the Market

CHAPTER 1

Lon and Shorty

Lon was tall, prematurely graying, a creative thinker with interesting hobbies and intelligent children, and he was starting to feel like a real dope.

He was trying to secure his family’s financial future, looking for this investment and that, the way a good father and forward-thinking man should, but he was starting to doubt his intelligence. Lon had started playing the stock market.