Show Me Your Options! The Guide to Complete Confidence for Every Stock and Options Trader Seeking Consistent, Predictable Returns

285 Pages·2012·1.33 MB·English

by  Steve Burns

Show Me Your Options!
Books by Steve Burns
How I Made Money Using the Nicolas Darvas
System
New Trader, Rich Trader
How to Get More Followers on Twitter
Show Me
Your
Options!

The Guide to Complete Confidence for Every
Stock and Options Trader Seeking Consistent,
Predictable Returns

Steve Burns
Christopher Ebert
All rights reserved.
No part of this publication may be
reproduced, stored in a retrieval system, or transmitted
in any form or by any means, electronic, mechanical,
photocopying or otherwise, without the prior permission of
the copyright owner.

ISBN: 9781607964193

© Copyright 2012 by Steve Burns and Christopher Ebert

Published by BN Publishing.

ALL RIGHTS RESERVED

[email protected]
www.bnpublishing.com
We wrote this book to give stock traders a stock
option book that was neither so simple that it
insulted their intelligence but at the same time
not so complicated that it was beyond
comprehension. We also wanted to make it a fun
read as opposed to feeling like a boring college
lecture. We believe we have accomplished these
missions.
op·tion
[op-shuhn]

–noun
1. the power or right of choosing

2. something that may be or is chosen; choice

3. the of choosing
act

4.
stock option

5. a acquired, as by payment of a premium or consideration,
privilege the
of demanding, within a specified , the carrying out of a transaction
time
upon stipulated terms; the right, as granted in a contract or by an
initial payment, of acquiring something in the future

- Dictionary.com
CONTENTS
Foreword
Chapter 1 options are not assets, they are bets.
Chapter 2 every option contract has a buyer and a seller; one is long, one is
short, but which one has the best odds of winning?
Chapter 3 strong trends are the friend of an option buyer and the enemy of an
option seller.
Chapter 4 time is an option seller’s friend, but the option buyer’s enemy. (theta)
Chapter 5 volatility is the option buyer’s friend but the option seller’s enemy.
(vega)
Chapter 6 how much of the move do you get for the money? (delta)
Chapter 7 stocks for rent: covered calls
Chapter 8 selling lottery tickets: naked options
Chapter 9 buying lottery tickets: deep out-of-the-money options
Chapter 10 trends determine who wins: strangles and straddles
Chapter 11 the twins: every position has a synthetic relative
Chapter 12 spreads: ratio, calendar, diagonal
Chapter 13 the wind beneath the pro’s wings: butterflies and condors
Chapter 14 dealing with the behavioral problems of immature options
Chapter 15 A trader’s choices: insurance, stop losses, or ruin
Chapter 16 your method, your rules, your edge
Appendix A: relative time value of options based on the time to expiration of
the contract
Appendix B: odds and expected payout of selected option strategies
Appendix C: the relationship between option premiums, deltas, standard
deviations, and profit probabilities
Appendix D: time progression payout potential
Appendix E: expanded table of synthetic positions
About the Authors
Foreword

FOREWORD

Steve Burns and I met by chance, however it was inevitable that we would bump into each other given our
similar trading styles and how active we are on Twitter in our niche. I was looking for someone to
contribute book reviews on my blog and I discovered that Steve had reviewed a mind boggling amount of
books with honest and concise summaries. Considering the knowledge that he has accumulated from all
those books that he read, I believe him to be the perfect candidate to share his knowledge with aspiring
traders to help them avoid many of the pitfalls that new traders can run into. I approached Steve to see if he
wanted to post his reviews on my site and soon after we formed a strong relationship. Steve's ability to sift
through the sheer amount of information available in myriad books on trading and take away the important
aspects traders need to focus on to be successful is remarkable indeed.
Through Steve I was fortunate enough to be introduced to the "Options Scientist" Christopher Ebert. Steve
mentioned that Christopher had a firm understanding of options and was very creative with his option
strategies, but that is an understatement as I would say he is in the top 1% of understanding the ins and outs
of options as you will soon discover as you progress through "Show Me Your Options." Working with Chris
as the resident options guru on zentrader.ca has given me a chance to learn from one of the best. Chris is
very generous with his time and is always willing to answer any questions I may have and offer suggestions
on how to structure an option trade.
This book has forced me to look at options in a whole new light as it dives from the basics into extremely
advanced strategies in an easy to read format. It could have more appropriately been named, "Everything
you've ever wanted to know about options, but didn't know to ask." They cover strategies that I didn't even
know existed. Having been trading since 1998 I'll be the first to admit that I'm intimidated by complex
option strategies, but that comes from a lack of understanding. We fear what we don't know. This book may
require a second reading for option novices like myself, but I highlighted many passages to revisit and for
the most part Chris and Steve present this information in a story format from the standpoint of a
mentor/student that is very relatable. Once armed with the new information such as how to use straddles
and strangles effectively, I can expand how I personally trade and invest through the use of options.
There are two kinds of traders in this world. Those who use options and those who don't. I believe Steve
and Chris are effectively bridging the gap. Being primarily a momentum trader, I was a little surprised to
see the author's views on covered calls, but it makes complete sense after reading their logic.
The problem with Covered Call writing is that you get a small premium to relinquish the upside profit on a
stock, but you retain the whole downside risk. It is like doing the opposite of what you want to do in
trading; you are letting your losers run and cutting your winners short.
From this standpoint you should never sell calls in a strong trend as you are capping your winnings, or as
they describe more appropriately, a "stop win", which flies in the face of what a lot of option experts will
tell you to do with stocks in your portfolio. "Strong trends are the friend of an option buyer and the enemy
of an option seller," The book is an education that you will definitely get your money out of, if you apply
their principles and various strategies.
When I was approached about writing this forward I was honoured and excited because I believe this is the
book that could help me wrap my head around options and help boost my equity curve. I was their target
market. Someone who has always wanted to implement options in their trading but hasn't found a book that
discusses the many strategies without losing me in the process - until now. Options talk can be very
technical but "Show Me Your Options" is broken down into bite-size chapters and useful options analogies
that will help anybody muddle through options trading and come out on the other side with a couple of
strategies they can use right now. The measure of a great trading book is whether I can take what I read last
week and inject that into my trading on the next. Mission accomplished guys.

Jeff Pierce
@zentrader
zentrader.ca
Chapter 1
OPTIONS ARE NOT ASSETS, THEY ARE
BETS.

Stock Trader heard the alarm go off. He rolled over in bed and hit his
beloved snooze button. It was time to head off to his day job, but his mind rarely
stopped thinking of his second job of trading. Trading would be his ticket out of
the nine-to-five corporate world. He wanted to move from being an employee of
a company to an investor in the company. He wanted his money to work for him
and be able to stop working for money. His dream was financial independence.
Of course, all his fellow employees thought he was nuts. Most of his friends at
work could not comprehend ever not having a job, or that not having a job
should even be a goal. Stock Trader, though, was different; he ignored all the
negativity and doubt and just kept on doing what others believed was
impossible.
He beat the S&P 500 year after year
He went to cash and avoided downtrends
He sold stocks short and made money in downtrends
Many months he made more trading than working
He built his accounts over time even during market crashes
As he lay in bed he realized why he continued working so hard at
trading. He wanted the freedom to do what he wanted, when he wanted. His goal
was not material things, oddly enough. He wanted time, he wanted freedom, and
he did not want to be a slave to earning a wage and paying bills.
“Isn’t that gambling?” They would ask him in a concerned and slightly
condescending tone at work.
“No, it is a business like any other. I use the same principles as any other
business. I buy and sell inventory, I follow trends and I manage risk. I participate
in auctions and use best practices to get an edge over my competitors. The
company we work for gambles more than I do,” Stock Trader would respond.
Unfortunately, his audience really didn’t understand what he was talking about.
With only a few likeminded friends, Stock Trader continued along his
journey in the stock market, trading, reading, and learning. He truly loved the
stock market. He would watch CNBC like other men watched ESPN. While
other men were entering fantasy baseball and football leagues, he was entering
stock trading contests online. For him it was not just about making money; it
was a passion of his, a challenge of both strategy and wit. Determination and
will power separated many winners from the losers in the stock market. He loved
the stock market game.
He had always loved stock trading. He had been fascinated with quotes
and what made stocks move up and down from the time he was a small child. As
a matter of fact, he had an account and was trading something for as long as he
was legally old enough to do so. When he was too young for stocks, he had
collected and traded coins, baseball cards, and comic books. He did not know it
at the time, but these activities were training him for the markets.
When a certain superhero was popular, that character’s comic books
would go up in value. A movie release, cartoon, or television show could cause a
bull market in that superhero. This prepared him to see that a hot product could
send a company's stock soaring.
Future record setting expectations for a rookie baseball star set his cards
on an uptrend as long as he met expectations for home runs, batting average, and
RBIs each season, much like earnings expectations drove stock prices in the
market. One bad season could lower the value of the player’s cards just like a
bad earnings announcement could lower a stock’s price. Rookie cards could
make big money if their careers took off, just like small cap companies in the
stock market if their products and earnings took off in an uptrend. Hall of Fame
players' cards stayed about the same, their growth years being behind them.
Everyone knew where the Hall of Famers would end up, much like most big cap
stocks that just meander along at about the same price with their growth years
being behind them.
When he was young, he visited coin shows and made purchases for his
growing collection. Years later, as he sold his coin collection, he learned the
difference between what something was purported to be worth by a book on
prices versus what a buyer was willing to pay for it. There was evidently a