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Overview
When it comes to boosting your portfolio, you’ve got options!
Looking for a new way to flex your investing muscle? Look no further! Options Trading For Dummies offers trusted guidance for anyone ready to jump into the versatile, rewarding world of stock options. And just what are your options options? This book breaks down the most common types of options contracts, helping you select the right strategy for your needs. Learn all about the risk-reward structure of options trading and reduce your risk through smart mixing and matching.
Today’s markets are more topsy turvy than ever before, but there is also more potential for everyday investors like you to profit, regardless of economic conditions. Options are great for broadening your retirement portfolio
or earning a little extra scratch through shorter-term positions. Options Trading For Dummies is your plain-English resource for learning how!
- Demystify the world of options contracts and how to trade them, including index, equity, and ETF options
- Use technical analysis to create a solid trading strategy that limits your risk
- Protect your assets and avoid the pitfalls common to first-time options traders
- Learn about covered calls, butterfly positions, and other techniques that can enhance your gains
Thinking of trading options, but not sure where to start? This latest edition of Options Trading For Dummies provides you with step-by-step advice for boosting your income under today’s market conditions.
Trading options is a bit different from trading stocks, but they both require research and study. If you're going to trade options, it's important that you know order types, how to read changes in the market with charts, how to recognize how stock changes affect indexes and options, and how indexes are built.Trading order typesA variety of order types are available to you when trading stocks; some guarantee execution, others guarantee price.
About The Author
Dr. Joe Duarte is a financial writer, private investor and trader, and former money manager/president of River Willow Capital Management. In addition to Options Trading For Dummies, he is the author of Trading Futures For Dummies and Market Timing For Dummies. Visit his website at joeduarteinthemoneyoptions.com
Articles From The Book
3 results
General Macs
Articles
Here’s a hypothetical scenario that a trader might encounter. The market is trying to begin a new bull market by entering a bullish transition phase. At this time, your $100,000 example portfolio is sitting 100 percent in cash. Your goal: Establish ten positions by the height of the bull market, which means that you plan to allocate an average of $10,000 of your initial capital for each position.
General Macs
Articles
To help you get a feel for entering and exiting positions, take a look at a sample trade made by a hypothetical position trader. The idea is to help you understand the rationale and the timing. You can also use this example to practice picking entry and exit points based on historical pricing.As a position trader, your week begins during the weekend.
General Macs
Articles
Successful traders share a common trait: They all successfully manage their money. The critical points of successful money management may be difficult to implement, but they’re easy to identify. They include
Planning your trades carefully by identifying entry and exit points
Minimizing losses by ruthlessly adhering to your stop‐loss points
Protecting your profits by setting trailing stops on your trades and adjusting them over time to lock in gains
Being objective about your positions and quickly exiting your trades when the trend ends
When using technical analysis to make your trades, you may not always get the lowest entry price or the highest exit price.
General Macs
Articles
A few arguments against technical analysis may actually make some sense, but the irrelevant complaints far outweigh the legitimate. For example, some people wrongly assert that no technicians have been successful over the long run and that no technician has mustered the stature or success of illustrious market moguls like Warren Buffett, Benjamin Graham, or Peter Lynch.
Stocks
Articles
A call option provides you with profits similar to long stock, whereas a put option provides you with profits similar to short stock. This makes sense given your rights as an option holder, which allow you to buy or sell stock at a set level. There is one slight difference between stock rewards and option rewards: Options require an initial premium payment that you must consider when identifying potential gains.
General Macs
Articles
Price data is used in charts to give you a view of market trading activity for a certain period. The following list gives you the lowdown on some of the chart types you might encounter while you track your investments:
Line chart: This chart uses price versus time. Single price data points for each period are connected using a line.
General Macs
Articles
Both simple moving averages (SMAs) and exponential moving averages (EMAs) are used regularly by long‐term investors, position traders, and short‐term traders alike. Each moving average has its strengths and weaknesses. Which you choose can be a matter of personal preference, but one may be better suited than the other depending on the time frame you’re trading.
General Macs
Articles
You’ll see advertisements on the Internet, in trade magazines, and in newspapers for foolproof systems that promise amazing returns. Sometimes you’ll even see claims for systems that regularly return hundreds of percent with little or no risk.Although some stocks do actually achieve astronomical returns of hundreds and sometimes thousands of percent, those cases are rare.
General Macs
Articles
A financial index is a measuring tool of prices for groups of stocks, bonds, or commodities. A change in one stock translates into index changes. Some examples are:
When a high-priced stock declines in a price-weighted index, it leads to bigger moves down in an index when compared to declines in a lower-priced stock.
General Macs
Articles
To help understand financial index changes, you should know how indexes are built. Indexes are not created equal (well . . . one is). Financial indexes are constructed in three different ways:
Price-weighted: Favors higher-priced stocks
Market cap-weighted: Favors higher-cap stocks
Equal dollar-weighte
General Macs
Articles
The currency exchange market is made up of about 2,000 dealer institutions that are particularly active in Forex. Most of the players are commercial or investment banks that are geographically dispersed in the key financial centers around the world. Among these 2,000 dealers, about 100 to 200 members carry on the core trading and market‐making activities.
General Macs
Articles
Despite what some naysayers would have you believe, traders can get a wealth of information from analyst calls. In addition to what senior management is saying, you also need to listen to how they’re saying it. If management is happy with the results, they’ll probably be upbeat and talking about a rosy future for the company.
General Macs
Articles
Considering the amount of lag time between events and official pronouncements, you’re likely wondering how you can determine which part of the cycle the economy is in and how you, as a trader, can use this information. Most economists attribute changing business cycles to disturbances in the economy.Growth spurts, for example, result from surges in private or public spending.
General Macs
Articles
One of the most impactful, high‐leveraged activities you can adopt is to keep track of all your trading activities in a trading journal. Doing so tracks your experiences in the market, helps you process and carefully analyze them while also keeping them in a permanent place, and then allows you to return to those journal entries at a later time to learn from your past experiences.
General Macs
Articles
After you’ve identified the dominant trend, the leading and lagging sectors, and the current economic climate, it’s time to select the most promising stocks to trade. Beyond general market conditions, two factors drive a stock’s price higher or lower:
The fundamental condition of the company’s business
The technical condition of the company’s stock
These topics can be covered in great detail.
General Macs
Articles
Similar to moving average–based systems, a breakout trading system can take many forms. To test a different approach, you can define a breakout system as follows:
Buying at tomorrow’s opening price when today’s closing price is above the highest high price that occurred during the last 20 days
Selling at tomorrow’s opening price when today’s closing price is below the lowest low that occurred over the last 20 days
These trading rules are loosely based on the rules for Donchian channels (sometimes called price channels), which comprise a breakout system developed by Richard Donchian in the 1950s.
General Macs
Articles
The stochastic oscillator indicates momentum and is intended to help show buying and selling pressure. This indicator compares current closing prices with the recent range of high to low prices and displays the results on a chart. Stochastic oscillator values cycle, or oscillate, between 0 and 100 percent.The stochastic oscillator cycles between 0 and 100 percent.
General Macs
Articles
Traders sometimes need strategies for getting out of an option. After you buy an option, you have to decide how you want to opt out of that position. You can choose one of the following three alternatives:
Offset the option.
Continue holding the option.
Exercise the option.
Offsetting the option
You offset an option by liquidating your option position, usually in the same marketplace that you bought the option.
Stocks
Articles
A financial option is a contractual agreement between two parties. Although some option contracts are over the counter, meaning they are between two parties without going through an exchange, standardized contracts known as listed options trade on exchanges. Option contracts give the owner rights and the seller obligations.
General Macs
Articles
Trading in options and futures is risky business, and regulations governing those trades are stringent, even with regard to allowing you to open an account. Before opening an account for you, a broker must provide you with a disclosure document that describes the risks involved in trading futures and options contracts.
General Macs
Articles
When analyzing ETFs, you need to consider two things: First you must research the underlying indexes and classification benchmarks so you know what types of stocks are likely to be part of the ETF. Then you need to research the fund’s trading history to know how it performed in the various types of markets.For example, if you believe that a full recession is underway, then you may want to consider weighting your portfolio more heavily with cyclical and technology stocks.
General Macs
Articles
As any experienced investor will tell you, there’s no single magic tool guaranteed to make you a profitable trader. Finding success in the market is about discovering, learning, and committing to the strategies and techniques that fit your trading style best.Technical analysis is a useful trading tool that can help you decide what action to take when stocks trend a certain way.
Investment Vehicles
Articles
Many trend‐following trading systems use a moving average for their starting points. In this trend‐following example, the system is designed for position trading, which means you use a relatively long moving average. Short selling isn’t permitted with this simple system.The first step is to define buy and sell rules for your initial testing.
Investment Vehicles
Articles
Trading options is a bit different from trading stocks, but they both require research and study. If you're going to trade options, it's important that you know order types, how to read changes in the market with charts, how to recognize how stock changes affect indexes and options, and how indexes are built.Trading order typesA variety of order types are available to you when trading stocks; some guarantee execution, others guarantee price.
Investment Vehicles
Articles
A variety of order types are available to you when trading stocks; some guarantee execution, others guarantee price. This brief list describes popular types of trading orders and some of the trading terminology you need to know.
Market order: A market order is one that guarantees execution at the current market for the order given its priority in the trading queue (a.
General Macs
Articles
For many traders, the quest to find a profitable countertrend trading system is all consuming. Countertrend systems appear desirable because their goal is to buy low and sell high. These systems try to identify inflection points, or the moments when stocks change direction, so traders can take positions close to when they occur.
General Macs
Articles
A discretionary trading system makes you an active participant in all phases of the trades you make and provides you with a great deal of leeway when making trading decisions. With this approach, evaluating the economic data, analyzing the broad‐market indexes, determining which sectors are showing strength, and identifying high‐relative‐strength stocks that are breaking out of long trading ranges and hoping to catch a new trend all are up to you.
General Macs
Articles
How do you know which part of the business cycle the economy is in? Officially, you don’t usually find out until months after that part of the cycle has either started or ended. The National Bureau of Economic Research (NBER) officially declares the peaks and troughs. The NBER is responsible for formally announcing the ends of peaks and troughs and signaling when a recession (end of a peak) or expansion (end of a trough) starts.
General Macs
Articles
A mechanical trading system addresses some of the problems that arise when using discretionary systems. Mechanical systems usually are computer‐based programs that automatically generate buy and sell signals based on technical and/or fundamental data. You’re expected to blindly follow the resulting trading signals.
General Macs
Articles
Trend following is favored by many technicians for one simple reason: Trends offer excellent trading opportunities for profit. Unfortunately, the popularity of the trend‐following approach is one of its greatest weaknesses. Too many of these systems generate very similar buy and sell signals, which, in turn, makes outperforming the average trader difficult for any individual trend‐following trader.
General Macs
Articles
It’s important to understand the array of risks that traders, investors, and other market participants face. The three general categories are market risks, investment risks, and trading risks.
Market risks
For the most part, market risks are out of your control. Of course you know the risk that the markets are bound to rise and fall, but understanding the risks you face when they do helps you manage your money better.
General Personal Finance
Articles
No matter which analyst’s report you’re reading, you must remember that the analyst’s primary income is coming either from the brokerage house or the large institutional clients that he or she serves. Analysts rate stocks on whether you should consider purchasing them, but no standardized rating system exists.