The objective of the Option Sleuth is educate the investor on how a managed option strategy as part of a diversified portfolio can generate additional income and boost returns.

There are two basic types of options: the call and the put.

A call is an option contract that gives the holder the right to buy the underlying security at a specified price for a certain, fixed period of time.

A put is an option contract that gives the holder the right to sell the underlying security at a specified price for a certain, fixed period of time.

Option contracts may be opened as a buy (long positions) or a write (short positions).

The following common option strategies are defined in terms of a net long position, however each strategy may also be opened as a net short position.

• Buy a call
Outlook on the underlying equity: Positive
Potential gain: Unlimited
Potential loss: Limited to price paid for call

• Buy a put
Outlook on the underlying equity: Negative
Potential gain: Limited to the value of the equity
Potential loss: Limited to price paid for put

• Buy a call spread (buy a call and sell a higher strike call)
Outlook on the underlying equity: Positive
Potential gain: Limited to spread value less price paid
Potential loss: Limited to price paid for spread

• Buy a put spread (buy a put and sell a lower strike put)
Outlook on the underlying equity: Negative
Potential gain: Limited to spread value less price paid
Potential loss: Limited to price paid for spread

• Covered call (buy equity, sell higher strike call)
Outlook on the underlying equity: Positive
Potential gain: Varies
Potential loss: Limited to value of equity less price received for call

 
 
 
 

Sunday, February 1, 2009

Getting Started in Options by Michael C. Thomsett

This week's featured book on options trading:

Getting Started in Options by Michael C. Thomsett

Getting Started in Options
by Michael C. Thomsett
Wiley (August 2007)

From the publisher: Many people fail to capitalize on the potentially lucrative opportunities that options present, simply because they don't fully understand how options work. But with Getting Started in Options, author Michael C. Thomsett looks to change this.

Written in a straightforward and accessible style, Getting Started in Options, provides you with a solid foundation in this field, and will help you become fully familiar with one of today's most important investment vehicles. Each page of this informative guide addresses essential options issues, including how to:

• Identify your own risk tolerance levels and decide how to effectively incorporate options into your own portfolio

• Master options terminology and concepts

• Use options in a powerful insurance strategy to protect against losses in stock investments

• Perform "paper trades" before putting real money at risk

• Utilize the many new online resources available to you

• Understand time values, striking price, and expiration

Besides new examples, updated charts, and timely investor tips, this latest edition also includes important new chapters that reflect ongoing innovations within the options market, such as the many uses of options beyond their obvious buying and selling functions, different methods available to calculate returns on options trades, and much more.

You don't need to be a financial expert to make it in the world of options, but you do need to be well informed. With Getting Started in Options as your guide you'll quickly discover how to make options work for you.

Also available: Getting Started in Options (Kindle edition). Learn more about the Amazon Kindle, a wireless reading device.

Posted by Your Community Resource Guide to Wine, Style, and Finance. at 10:32 AM

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