Option Theory and Trading
A Step-by-Step Guide To Control Risk and Generate Profits
Wiley Trading Series
1. Edition July 2009
368 Pages, Hardcover
Wiley & Sons Ltd
ISBN:
978-0-470-45578-4
John Wiley & Sons
An accessible guide to understanding and using options
Leading options educator Ron Ianieri has created a tried-and-true options training program drawing on his years of experience training new traders. The goal of Option Theory and Trading is to give readers the knowledge to select the optimal strategy for a given situation and to implement that strategy in the most cost-efficient way possible. In addition, the book explains the risk of any and all option positions; examines the techniques and costs involved in countering those risks; and shows when and how to exit a losing trade.
Ron Ianieri (Boca Raton, FL) is the cofounder and chief options strategist for The Options University, a firm that provides courses and other training materials to aspiring options traders. Ianieri's Option Theory and Trading Course is considered one of the best options training tools in the industry.
Preface.
Acknowledgments.
PART I Understanding Terms and Theory.
CHAPTER 1 Options Basics and Terms.
Calls and Puts.
Classes and Series.
In the Money, Out of the Money, and At the Money.
Premium and Time Decay.
Intrinsic versus Extrinsic Value.
Volatility.
CHAPTER 2 Calls and Puts.
Call Options.
Put Options.
CHAPTER 3 Option Theory.
Option Pricing Models.
Fundamentals of Pricing Models.
Types of Pricing Models.
Inputs of the Options Pricing Model.
Outputs of the Pricing Model.
CHAPTER 4 Option Theory and the Greeks.
Delta.
Gamma.
Vega.
Theta.
Second-Tier Greeks.
CHAPTER 5 Synthetic Positions.
Defining Synthetics.
Synthetic Stock.
Synthetic Call.
Synthetic Put.
PART II Basic Strategies.
CHAPTER 6 Introduction to Trading Strategies.
Directional Trading Strategies.
In-the-Money, Out-of-the-Money, and At-the-Money Options.
Leverage and Risk.
CHAPTER 7 Covered Call/Buy-Write Strategy.
Foundations of the Strategy.
Performance in Different Scenarios.
Lean.
Rolling the Position.
Examples.
Covered Call/Buy-Write Synopsis.
CHAPTER 8 The Covered Put/Sell-Write Strategy.
Reviewing Selling Short.
Foundations of the Strategy.
Performance in Different Scenarios.
Lean.
Rolling the Position.
Examples.
Covered Put/Sell-Write Synopsis.
CHAPTER 9 The Protective Put Strategy.
Foundations of the Strategy.
Performance in Different Scenarios.
Lean.
When to Use the Protective Put Strategy.
Examples.
Protective Put Synopsis.
CHAPTER 10 The Synthetic Put/Protective Call Strategy.
Foundations of the Strategy.
Performance in Different Scenarios.
Lean.
When to Use the Protective Call Strategy.
Examples.
Synthetic Put Synopsis.
CHAPTER 11 The Collar Strategy.
Foundations of the Strategy.
Performance in Different Scenarios.
Lean.
Examples.
Collar Synopsis.
PART III Advanced Strategies: Spread Trading, Straddles, and Strangles.
CHAPTER 12 Vertical Spreads.
Construction of a Vertical Spread.
Value and the Vertical Spread.
Spread Prices Fluctuate.
Factors that Affect Spread Pricing.
Rolling the Position.
Time Decay and Volatility Trading Opportunities.
An Imaginary Spread Scenario.
Recap with Special Insights.
Examples.
Bull Spread Synopsis.
Bear Spread Synopsis.
CHAPTER 13 Time Spreads.
Construction of the Time Spread.
Behavior of the Spread.
Effects of Stock Price on the Time Spread.
Effects of Volatility on the Time Spread.
Buyer Risk and Reward.
Seller Risk and Reward.
Rolling the Position.
Concluding Thoughts.
Examples.
Time Spread Synopsis.
CHAPTER 14 The Stock Replacement/Covered Call Strategy (Diagonal Spread).
When to Use the Diagonal Spread.
Rolling the Position.
Conclusion.
CHAPTER 15 Straddles.
What Is a Straddle?
Straddle Scenarios.
How It Works.
Factors that Affect Straddle Prices.
Risks and Rewards.
Break-Even, Maximum Reward, and Maximum Risk.
Conclusion.
Examples.
Long Straddle Synopsis.
Short Straddle Synopsis.
CHAPTER 16 Strangles.
What Is a Strangle?
Strangle Scenarios.
How It Works.
Factors that Affect Strangle Prices.
Risks and Rewards.
Break-Even, Maximum Reward, and Maximum Risk.
Conclusion.
Examples.
Long Strangle Synopsis.
Short Strangle Synopsis.
PART IV Combination Strategies.
CHAPTER 17 The Butterfly.
Constructing the Butterfly.
Why Use Butterflies?
Butterfly and Synthetic Positions.
What Will a Butterfly Cost?
Butterfly and the Greeks.
Iron Butterfly.
Long Iron Butterfly.
Using the Butterfly.
Long Butterfly Synopsis.
Short Butterfly Synopsis.
CHAPTER 18 The Condor.
Long Condor.
Short Condor.
Why Use Condors?.
How It Works.
Condors versus Butterflies.
Condors and the Greeks.
Iron Condors.
How Do We Use Condors?
Long Condor Synopsis.
Short Condor Synopsis.
Conclusion.
Appendix: Five Trading Sheets.
About the Author.
Index.
Acknowledgments.
PART I Understanding Terms and Theory.
CHAPTER 1 Options Basics and Terms.
Calls and Puts.
Classes and Series.
In the Money, Out of the Money, and At the Money.
Premium and Time Decay.
Intrinsic versus Extrinsic Value.
Volatility.
CHAPTER 2 Calls and Puts.
Call Options.
Put Options.
CHAPTER 3 Option Theory.
Option Pricing Models.
Fundamentals of Pricing Models.
Types of Pricing Models.
Inputs of the Options Pricing Model.
Outputs of the Pricing Model.
CHAPTER 4 Option Theory and the Greeks.
Delta.
Gamma.
Vega.
Theta.
Second-Tier Greeks.
CHAPTER 5 Synthetic Positions.
Defining Synthetics.
Synthetic Stock.
Synthetic Call.
Synthetic Put.
PART II Basic Strategies.
CHAPTER 6 Introduction to Trading Strategies.
Directional Trading Strategies.
In-the-Money, Out-of-the-Money, and At-the-Money Options.
Leverage and Risk.
CHAPTER 7 Covered Call/Buy-Write Strategy.
Foundations of the Strategy.
Performance in Different Scenarios.
Lean.
Rolling the Position.
Examples.
Covered Call/Buy-Write Synopsis.
CHAPTER 8 The Covered Put/Sell-Write Strategy.
Reviewing Selling Short.
Foundations of the Strategy.
Performance in Different Scenarios.
Lean.
Rolling the Position.
Examples.
Covered Put/Sell-Write Synopsis.
CHAPTER 9 The Protective Put Strategy.
Foundations of the Strategy.
Performance in Different Scenarios.
Lean.
When to Use the Protective Put Strategy.
Examples.
Protective Put Synopsis.
CHAPTER 10 The Synthetic Put/Protective Call Strategy.
Foundations of the Strategy.
Performance in Different Scenarios.
Lean.
When to Use the Protective Call Strategy.
Examples.
Synthetic Put Synopsis.
CHAPTER 11 The Collar Strategy.
Foundations of the Strategy.
Performance in Different Scenarios.
Lean.
Examples.
Collar Synopsis.
PART III Advanced Strategies: Spread Trading, Straddles, and Strangles.
CHAPTER 12 Vertical Spreads.
Construction of a Vertical Spread.
Value and the Vertical Spread.
Spread Prices Fluctuate.
Factors that Affect Spread Pricing.
Rolling the Position.
Time Decay and Volatility Trading Opportunities.
An Imaginary Spread Scenario.
Recap with Special Insights.
Examples.
Bull Spread Synopsis.
Bear Spread Synopsis.
CHAPTER 13 Time Spreads.
Construction of the Time Spread.
Behavior of the Spread.
Effects of Stock Price on the Time Spread.
Effects of Volatility on the Time Spread.
Buyer Risk and Reward.
Seller Risk and Reward.
Rolling the Position.
Concluding Thoughts.
Examples.
Time Spread Synopsis.
CHAPTER 14 The Stock Replacement/Covered Call Strategy (Diagonal Spread).
When to Use the Diagonal Spread.
Rolling the Position.
Conclusion.
CHAPTER 15 Straddles.
What Is a Straddle?
Straddle Scenarios.
How It Works.
Factors that Affect Straddle Prices.
Risks and Rewards.
Break-Even, Maximum Reward, and Maximum Risk.
Conclusion.
Examples.
Long Straddle Synopsis.
Short Straddle Synopsis.
CHAPTER 16 Strangles.
What Is a Strangle?
Strangle Scenarios.
How It Works.
Factors that Affect Strangle Prices.
Risks and Rewards.
Break-Even, Maximum Reward, and Maximum Risk.
Conclusion.
Examples.
Long Strangle Synopsis.
Short Strangle Synopsis.
PART IV Combination Strategies.
CHAPTER 17 The Butterfly.
Constructing the Butterfly.
Why Use Butterflies?
Butterfly and Synthetic Positions.
What Will a Butterfly Cost?
Butterfly and the Greeks.
Iron Butterfly.
Long Iron Butterfly.
Using the Butterfly.
Long Butterfly Synopsis.
Short Butterfly Synopsis.
CHAPTER 18 The Condor.
Long Condor.
Short Condor.
Why Use Condors?.
How It Works.
Condors versus Butterflies.
Condors and the Greeks.
Iron Condors.
How Do We Use Condors?
Long Condor Synopsis.
Short Condor Synopsis.
Conclusion.
Appendix: Five Trading Sheets.
About the Author.
Index.
Ron Ianieri is the cofounder and past chief options strategist for Options University, and the founder and Chief Options Strategist of ION Options, his new firm that provides courses, services, and training to aspiring options traders. Ianieri's Option Theory and Trading Course is considered one of the best options training tools in the industry. He has appeared on CNBC, CNN, and Fox Business News. Ianieri graduated from St. Joseph's University in Philadelphia with a degree in finance.
