The Complete Book of Option Spreads and Combinations: Strategies for Income Generation, Directional Moves, and Risk Reduction

442 Pages·2014·12.1 MB·English

by  Scott Nations

T C B
HE OMPLETE OOK
O S
OF PTION PREADS

C
AND OMBINATIONS
Strategies for Income Generation, Directional
Moves, and Risk Reduction
Scott Nations
Cover images: © iStock.com Taylor Hinton; © iStock.com Storman; © iStock.com / joel-t
Cover design: Wiley
Copyright © 2014 by Scott Nations. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data:
Nations, Scott.
The complete book of option spreads and combinations : strategies for income generation, directional
moves, and risk reduction / Scott Nations.
pages cm. – (Wiley trading)
Includes index.
ISBN 978-1-118-80545-9 (paperback); ISBN 978-1-118-80639-5 (ebk); ISBN 978-1-118-80620-3 (ebk)
1. Options (Finance) 2. Options (Finance)–Mathematics. 3. Investment analysis. I. Title.
HG6024.A3N347 2014
332.64′53–dc23
2014016781
For my mother, who always made the time to answer a question from a curious
kid.
CONTENTS

1. Foreword
2. Preface
1. The Spreads and Combinations
3. Chapter 1: Not Just More or Less but Different
1. The “Flavors”: Calls and Puts
2. The Expiration Date
3. The Strike Price
4. An Option Corresponds to 100 Shares of Stock
5. Defining an Option
6. Moneyness
7. What We Mean by Spread and Combination
8. A Final Thought
4. Chapter 2: Just a Little Math
1. The Option Price
2. Volatility and the Volatility Implied by the Option Price
3. Option Erosion
4. Option Price Sensitivities
5. Sensitivity to the Passage of Time
6. Sensitivity to the Price of the Underlying Stock
7. Changes in Volatility
8. Other Sensitivities
5. Chapter 3: Vertical Spreads
1. Buying and Selling Vertical Spreads
2. Vertical Spread Maximum and Minimum Values
3. Naming
4. Moneyness and Vertical Spreads
5. Bullish and Bearish Vertical Spreads
6. Selling a Call Vertical Spread
7. Breakeven Points
8. The Necessary Price Action
9. Vertical Spreads and Your Market Outlook
10. Asymmetry of Risk and Reward for Vertical Spreads
11. Option Delta and Likelihood
12. Vertical Spread Value Prior to Expiration
13. The Other Greeks
14. The Best Measure of Vertical Spread Cost
15. In-the-Money Vertical Spreads
6. Chapter 4: Covered Calls
1. Profitability
2. Covered Calls and Downside Protection—Not As Much As We’d Like
3. Using Covered Calls to “Create” Dividends
4. Having Your Shares Called Away
5. Don’t Fear Assignment
6. Stock Covered Vertical Call Spread
7. Chapter 5: Covered Puts
1. The Regret Point
2. Market Outlook
3. Out-of-the-Money Covered Puts
4. In-the-Money Covered Puts
5. At-the-Money or Nearly At-the-Money
6. Covered Put versus Covered Call
8. Chapter 6: Calendar Spreads
1. Call Calendar Spreads
2. Selling Calendar Spreads
3. Directionality
4. Catalysts
5. The Super Calendar
9. Chapter 7: Straddles
1. The Short Straddle
2. Likelihoods
3. Selling Covered Straddles
10. Chapter 8: Strangles
1. Selling Strangles
2. Selling Covered Strangles
11. Chapter 9: Collars
1. Wider Collars
2. In-the-Money Collars
3. Potential Outcomes
4. A Zero-Cost Collar
5. Skew
6. How a Collar Is Similar to Other Spreads and Combinations
7. Put Spread Collar
8. Call Spread Collar
12. Chapter 10: Risk Reversal
1. Likelihoods
2. How Skew Helps a Risk Reversal
3. Call Spread Risk Reversal
13. Chapter 11: Butterflies
1. Buying and Selling Butterflies—The Terminology
2. Put Butterflies
3. Butterflies Prior to Expiration
4. Butterflies and Your Market Expectations
5. Broken Butterflies
14. Chapter 12: Condors and Iron Condors
1. Selling a Condor
2. The Bid/Ask Spread and Condor Spreads
3. Iron Condor
4. Directional Condors
15. Chapter 13: Conversion/Reversal
1. Reversal
2. Dividends
3. Pin Risk
16. Chapter 14: Ratio Spreads and Back Spreads
1. Vertical Spreads, Butterflies, and Ratio Spreads
2. Call Ratio Spreads
3. Call Ratio Spreads for Stock Repair
4. Back Spreads
5. Super Back Spreads
17. Chapter 15: Other Spreads and Combinations
1. Married Put
2. Diagonal Spread
3. Iron Butterfly
4. Christmas Tree
5. Box Spread
6. Jelly Roll
7. Stupid
8. Guts
9. Other Potential Spreads and Combinations
18. About the Website
19. About the Author
20. Index
21. End User License Agreement
List of Tables

1. Table 1.1
2. Table 1.2
3. Table 1.3
4. Table 1.4
5. Table 2.1
6. Table 3.1
7. Table 3.2
8. Table 3.3
9. Table 3.4
10. Table 3.5
11. Table 3.6
12. Table 3.7
13. Table 3.8
14. Table 3.9
15. Table 3.10
16. Table 3.11
17. Table 3.12
18. Table 3.13
19. Table 3.14
20. Table 3.15
21. Table 3.16
22. Table 4.1
23. Table 4.2
24. Table 4.3
25. Table 4.4
26. Table 4.5