Put Option Strategies for Smarter Trading PDF (How to Protect and Build Capital in Turbulent Markets) explains all the put-based strategies in detail and shows how even a troubled market presents great opportunities to keep you in control. The worst aspect of volatile markets is a sense of not having control over events, and puts can be used to offset this apprehension. You have probably heard that astute traders can earn profits in all types of markets. Puts are among the best devices to accomplish that goal.
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Category: Options
Author: Michael C. Thomsett
Language: English
Free download link: At the end of the post
Introduction
Declining market value in stocks, alarming economic news, chronic housing and credit problems, uncertain oil prices—all these critical conditions that were worse than ever in 2008 and 2009 make the point that you need alternatives to survive in troubling economic times.
There is good news.
The options market is relatively young, but the popularity of options trading has grown exponentially every year since the early 1970s. This has occurred as increasing numbers of investors have realized that options are more than mere speculative tools. They are effective risk hedge instruments, cash generators, and portfolio management tools that virtually anyone can use beneficially. Even if you have very low risk tolerance, conservative options strategies can strengthen your portfolio and reduce market risks while generating current income.
In volatile markets, when you have no idea what stock values are going to be next month or even next week, options are especially valuable. In outright bear markets such as the market that started in 2007 and extended into 2009, put options offer a way to profit from declining stock values. This book is designed to explore a number of put strategies that can be used to provide profits when the markets are falling.
A put is an option designed to increase in value when the underlying security’s value falls. It is the opposite of a call, which is better known as an instrument that tracks a stock’s value and rises when the stock’s price rises. Traders often overlook put options because so many are naturally optimistic by nature. It is a common pitfall to believe that a stock’s value is always going to rise, and many investors treat their purchase price as a starting point from which values can only increase as time goes by. But anyone who was invested in the markets in 2008 and 2009 knows that this belief is flawed and also that it has expensive consequences. Stocks do fall in value. And when they do, it often defies logic. In 2008, rapid declines in stocks once thought to be invincible made the point that markets overreact. By the end of 2008, many stocks were available at bargain prices, but panic and fear were so widespread that few investors were brave enough to put capital into the equity
markets.
This is the perfect market for option trading—and for a number of reasons. On a purely speculative approach to markets that have declined, low prices represent values; and when those prices bounce back (as they always do), anyone who got in at the lowest price levels makes handsome profits. However, if you are so concerned about declining stocks that you do not want to invest in shares, options provide attractive alternatives. The same is true when markets peak at the top.
Overbought markets invariably correct; so if you don’t want to take profits, but you are concerned about declining values over the short term, options can be used to protect stock positions without having to sell shares.
There are so many possible uses for options and specifically for puts that you can take advantage of the potential in any kind of market. Whether prices are depressed or inflated, and whether the mood is bull or bear, puts are effective devices for maximizing profits. In volatile and falling markets, the value of puts is at a maximum. This is true because the mood in the markets is always fearful at such times. When market prices are rising rapidly, euphoria and even unjustified optimism rule, and in these conditions, putting money at risk is easy. But on the opposite side of the spectrum, when prices are low, doom and despair are the ruling emotions; and few people are willing to put money at risk in this environment.
All markets are cyclical, and that is why using puts as portfolio management devices should remain flexible. The most depressing market, whether in stocks, real estate, credit, or housing, is eventually going to come back and improve. When at the worst portion of a cycle, the situation always seems permanent, and investors cannot see their way to a recovery. But recovery does occur, and it always takes the markets by surprise. By the end of 2008, the P/E ratio of stocks on the S&P 500 had fallen from 26 three months earlier to about 18, a decline of more than 30 percent.
This fall in the overall market’s P/E ratio defines the bear market of the time. This ratio, which tracks market sentiment about the future price direction of stocks, is far lower than it was only four years earlier when it peaked above 40; but many people are surprised to learn that the dismal 2008 numbers were higher than historical averages. A few decades ago in the 1970s, S&P 500 P/E fell into single digits and did not rise above 20 until the mid-1980s; so the decline in this important benchmark by the end of 2008 demonstrated that the current market is not as severe or as depressed as it has been in the recent past.
All these historical trends, when viewed in perspective, make the point that even the most volatile current market needs to be analyzed in context. Most market cycles last between two and five years, and the longer the downturn, the more rapid the recovery seems to be. Past cycles have demonstrated this interesting tendency time and again. What this means for investors is that volatility and uncertainty—as troubling as they are—present opportunities as well. And using puts to take advantag of volatility can be quite profitable in several ways:
■ Producing short-term profits simply by timing buy and sell decisions based on rapid and volatile price changes;
■ Protecting long stock positions by using puts as a form of insurance for paper profits;
■ Entering into contingent purchase positions of stock using puts rather than committing funds; and
■ Employing a variety of combined strategies to hedge risk while producing short-term profits and leveraged control over stock.
This book explains all the put-based strategies in detail and shows how even a troubled market presents great opportunities to keep you in control. The worst aspect of volatile markets is a sense of not having control over events, and puts can be used to offset this apprehension. You have probably heard that astute traders can earn profits in all types of markets. Puts are among the best devices to accomplish that goal.
Table of Contents- Put Option Strategies for Smarter Trading PDF
INTRODUCTION: SURVIVING IN VOLATILE AND FALLING MARKETS 1
CHAPTER 1: THE FLEXIBLE NATURE OF OPTIONS: RISKS FOR ALL LEVELS 5
Terms of Options 6
Types of Options 6
Underlying Security 8
Strike Price 9
Expiration Date 10
Valuation of Options 10
Intrinsic Value 11
Time Value 12
Extrinsic Value 12
Dividends and Puts 14
Comparing Risk Levels 16
CHAPTER 2: PUTS, THE OTHER OPTIONS: THE OVERLOOKED RISK HEDGE 21
Puts as Insurance for Paper Profits 22
Selecting the Best Long Put 25
Long Puts to Hedge Covered Calls 29
Risk Considerations: Types of Risks 32
Inflation and Tax Risk 33
Market Availability/
Trade Disruption Risks 38
Portfolio and Knowledge/
Experience Risks 38
Diversification and Asset
Allocation Risk 39
Leverage Risk 41
Liquidity Risk (Lost Opportunity Risk) 42
Goal-based Risks 42
Error Risks 43
CHAPTER 3: PROFIT-TAKING WITHOUT SELLING STOCK: AN ELEGANT SOLUTION 45
The Insurance Put 45
Picking the Best Long Put:
Time, Proximity, and Cost 48
Buying Puts Versus Short-selling Stock 51
Rolling into Spreads to Offset Put Losses 53
Buying Puts to Protect Covered
Call Positions 56
Tax Problems with Long Puts 61
CHAPTER 4: SWING TRADING WITH PUTS: LONG AND SHORT OR COMBINED WITH CALLS 63
Basics of Swing Trading 65
A Swing Trading Method: Long and
Short Stock 69
The Alternative: Using Options 70
Long Options 71
Variations on the Options Swing
Trading Method 73
Short Options 75
Calls Only 75
Puts Only 76
Multiple Contract Strategies 77
Multiple Contracts 77
Multiple Strikes 78
Spread or Straddle Conversion 78
Covered Ratio Write Swing 79
Long and Short Combination 80
CHAPTER 5: PUT STRATEGIES FOR SPREADS: HEDGING FOR PROFIT 83
Bear Spreads 83
Bull Spreads 86
Calendar Spreads 89
Diagonal Spread Strategies 93
Combination Put Spreads 100
Call Bull Spread and Call Bear Spread
(Call-Call) 101
Call Bull Spread and Put Bear Spread
(Call-Put) 104
Put Bull Spread and Call Bear Spread
(Put-Call) 107
Put Bull Spread and Put Bear Spread
(Put-Put) 109
The Diagonal Butterfly Spread 112
CHAPTER 6: PUT STRATEGIES FOR STRADDLES: PROFITS IN EITHER DIRECTION 117
The Long Straddle 117
The Short Straddle 121
Strangle Strategies 127
Calendar Straddles 133
CHAPTER 7: PUTS IN THE RATIO SPREAD: ALTERING THE BALANCE 137
Ratio Put Spreads 138
Ratio Put Calendar Spreads 140
The Backspread (Reverse Ratio) 143
Ratio Calendar Combinations 146
The Diagonal Backspread 150
Short Ratio Puts 153
CHAPTER 8: PUTS AS PART OF SYNTHETIC STRATEGIES: PLAYING STOCKS WITHOUT THE RISK 157
Synthetic Stock Strategies 157
Synthetic Strike Splits 161
The Synthetic Put 163
CHAPTER 9: PUTS IN CONTRARY PRICE RUN-UPS: SAFE COUNTERPLAYS DURING BEAR MARKETS 167
Option Valuation and Volatility 168
Volatility Trading 170
Factors Affecting Option Value 172
Stock Price Movement 173
Stock Market Volatility and Trend 173
The Time Element 174
The Proximity Element 175
Dividend Yield and Changes 175
Interest Rates 176
Perceptions 176
Spotting the Overall Trend 177
Reliance on Stock-based Technical Analysis 179
Support and Resistance 179
Gaps and Breakouts 182
Double Tops and Bottoms 183
Head and Shoulders 184
Volatility Trends 186
CHAPTER 10: UNCOVERED PUTS TO CREATE CASH FLOW: RISING MARKETS AND REVERSAL PATTERNS 187
The Uncovered Short Put 188
Evaluating Your Rate of Return from
Selling Puts 191
Covered Short Straddles 194
Covered Short Spreads 197
Recovery Strategies for Exercised
Covered Straddles and Spreads 203
Short Puts in Rising Markets:
One-Sided Swing Trading 206
GLOSSARY 209
INDEX 219
Reviews
“In these financial times, this is an especially timely book. Michael C. Thomsett provides practical, direct instruction to investors on how to employ put options to enhance and protect their portfolios. A powerful guide for professionals and novices alike.“- Virginia B. Gerhart, CFP, President, Gerhart Associates.
” Michael C. Thomsett’s Put Option Strategies is a must read for all stock investors who want to protect profits and manage risk in volatile stock markets. This easy to read book explains the basic strategies and moves on to more sophisticated uses of put option strategies to hedge risk in bear markets. The use of leverage is clearly explained to provide the tools for conservative investors to increase their profitable trading. This book is an excellent resource for all stock investors and should be read by all investors who want to lock in profits and limit losses in volatile stock markets.”– Esme Faerber, author ofAll About Stocks;All About Investing;All About Bonds,Bond Mutual Funds, and Bond ETFs
” Michael C. Thomsett is an authority on options. In his latest work, he has skillfully clarified how to employ powerful techniques to protect portfolios and profit from uncertain times. This book is a must read.”- Scott Kyle, CEO, Coastwise Capital Group, and author ofThe Power Curve:Smart Investing Using Dividends, Options, and the Magic of Compounding
About the author
Michael C. Thomsettis a widely published author with over 70 published books. He is especially known for his options publishing. His books includeOptions Trading for the Conservative InvestorandThe Options Trading Body of Knowledge(FT Press),Winning with Options(Amacom Books),The LEAPS Strategist(Marketplace Books) and the best-sellingGetting Started in Options(John Wiley & Sons) which has sold over 250,000 copies and was released in 2009 in its 8th edition.
Thomsett also writes on many stock market investment topics. His Investment and Securities Dictionary(hardcover McFarland & Company and paperback Prentice Hall) was named byChoice Magazineas an Outstanding Academic Book of the Year. He also wroteThe Mathematics of Investing(John Wiley & Sons),The Stock Investor’s Pocket Calculator(Amacom) andStock Profits(FT Press). The author lives near Nashville and writes fulltime. His Web site iswww.MichaelThomsett.com.
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