Essential Option Strategies
Essential Option Strategies
UNDERSTANDING THE MARKET AND AVOIDING COMMON PITFALLS
JJ Kinahan
Copyright © 2016 by JJ Kinahan. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Although JJ Kinahan is an employee of TD Ameritrade, the views expressed are his own, in his individual capacity, and do not in any way represent the views of TD Ameritrade, Inc., its employees or affiliates. This information is not published by TD Ameritrade and should not be considered an endorsement by TD Ameritrade of any particular investment strategy, product or service described therein.
The information provided is for general information purposes only and is not intended to be the primary basis for investment decisions, nor should it be construed as an individualized recommendation or personalized investment advice.
Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options (ODD). Copies of the ODD are available from your broker or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606.
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Library of Congress Cataloging-in-Publication Data is available.
Names: Kinahan, J. J., 1963- author.
Title: Essential option strategies: understanding the market and avoiding
common pitfalls / J. J. Kinahan.
Description: Hoboken: Wiley, 2016. | Includes index.
Identifiers: LCCN 2016021570 (print) | LCCN 2016036186 (ebook) | ISBN 9781119263333 (hardback) | ISBN 9781119291541 (ePDF) | ISBN 9781119291510 (ePub)
Subjects: LCSH: Options (Finance) | Investments. | BISAC: BUSINESS & ECONOMICS / Finance.
Classification: LCC HG6024.A3 .K556 2016 (print) | LCC HG6024.A3 (ebook) | DDC 332.64/53 – dc23
LC record available at https://lccn.loc.gov/2016021570
Cover Design: Wiley
Cover Image: Stock market candle graph © Butsaya/iStockphoto
Foreword
I began trading options on the floor of the CBOE in the early 1980s, just a few years before JJ. Back then, we were trader indifferent, which meant we would trade anything with anybody. Today, we would say the same about our approach to the products and strategies that we choose. These days, the counterparty to our trades is a computer with theoretical algorithm with unlimited funding. Back then, it was some kid just like us – nervous and sweating while trying to make a few eighths.
JJ and I traded together, played together, worked together, and learned together. Luckily, we were among the survivors. We excelled at our craft by managing our egos and not getting caught in the fat tails (volatility) of a few explosive moves. But the business changed as it grew exponentially, and open outcry faced certain extinction around 2000.
Now, the original trader cowboys are gone. Billions of new dollars, lightning-fast servers, and hard-coded theoretical models have taken over. Still, JJ, myself, and a handful of others decided we still had a lot left to learn and to share publicly. The same customers we lived off of were now our partners. And with strong beliefs that options remain the greatest strategic instrument in the world, our new mission was clear: Let's gather the gang together and share our stories. First came the technology to facilitate our mission, and next came the content.
In his first book, JJ reviews, discusses, and critiques almost every progressive strategy available. He puts great context around those ideas, so they are usable in real time. You'll see through his stories that the trader spirit remains in his words and transcends decades and advancements in technology.
Preface
A lot has changed in the options world since I started my career as a floor trader on the Chicago Board Options Exchange (CBOE) thirty years ago. Obviously, technology has transformed the exchanges, and with one or two exceptions, the live pits with crowds of screaming traders, like in Figure P.1, are largely a thing of the past.
At the same time, options markets are no longer confined to industrial countries or limited to instruments such as stocks and commodities. Contracts are now listed on a wide array of different asset classes, including fixed income, precious metals, energy, and even volatility. In addition, sufficient advances in technology have enabled many emerging economies to offer options as investment opportunities and as tools to manage risk.
My focus in this book is helping you, the retail client, understand some of the more actively traded securities in the U.S. markets, where options on equities and futures trade on more than a dozen different exchanges today, and only two – the Chicago Board Options Exchange and the Chicago Mercantile Exchange – are hybrid markets with both electronic and floor-based pit trading.
Figure P.1 Live trading pits like this one are largely extinct
Source: Shutterstock
Technology is not only driving how instruments are traded, but it has changed how information flows as