Option Trading Body of Knowledge (Introduction & Chapter 1), The: Market Overview

by Michael C. Thomsett

This is the eBook version of the printed book. If the print book includes a CD-ROM, this content is not included within the eBook version. Read the following excerpt from The Option Trading Body of Knowledge , Introduction. Enhancing profits is a goal for every stock investor. The options market is one avenue to achieving this goal, but it is complex; within the market itself, there are many ways to trade. This makes the options market both exciting and potentially risky. The scope of possible strategies can be overwhelming for an options trader. The basic trades–buying calls or puts for speculation–are only the most obvious uses of options. They can be used in a broad range of expanded strategic applications. Some are very high-risk, and others are very conservative. One of the most popular strategies is the covered call, which involves selling one call against 100 shares of stock owned. A covered call seller (also called a writer) receives a premium when the option is sold, and that premium is profit if the call ends up expiring worthless. The short position can also be closed at any time or held until exercise. In any of these outcomes, the trader continues to earn dividends on the stock and has a lot of control over the outcome. A properly selected covered call can easily create double-digit profits in any of the possible outcomes. This makes the strategy practical for most people. On the far side of the spectrum is the practice of selling naked options. When traders do this, they receive premium income, but they also risk exercise and potentially large losses. Many variations of naked writes might be used to mitigate the market risk. To continue reading, purchase and download now.

286 pages, Kindle Edition

First published August 15, 2009

About the author

Michael C. Thomsett is an expert in technical analysis and stock markets. He has published dozens of books on the topic as well as peer-reviewed papers, magazine articles, and blog entries. He has been writing professionally since 1978 and his best-selling, Getting Started in Options (John Wiley & Sons) is currently in its 10th edition (published by DeGruyter with a new title, “Options”) and has sold over 350,000 copies. The author lives near Nashville, Tennessee and he writes full time.