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Trading Options to Win: Profitable Strategies and Tactics for Any Trader PDF

321 Pages·2003·0.79 MB·English
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Trading Options to Win Profitable Strategies and Tactics for Any Trader S. A. JOHNSTON John Wiley & Sons, Inc. Trading Options to Win Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding. The Wiley Trading series features books by traders who have survived the market’s ever changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional, or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future. For a list of available titles, please visit our Web site at www.WileyFinance.com. Trading Options to Win Profitable Strategies and Tactics for Any Trader S. A. JOHNSTON John Wiley & Sons, Inc. Copyright © 2003 by S. A. Johnston. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. Designations used by companies to distinguish their products are often claimed as trademarks. In all instances where John Wiley & Sons, Inc. is aware of a claim, the product names appear in initial capital or all capital letters. Readers, however, should contact the appropriate companies for more complete information regarding trademarks and registration. 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, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, e-mail: Contents Preface vii CHAPTER 1 Making Money with Money 1 CHAPTER 2 On the Trail of a Method: Risk, Leverage, and Markets 22 CHAPTER 3 Profitability 101: Expectation and Options 45 CHAPTER 4 Just the Facts, Ma’am: Avoiding Moonshine, Morons, and Myths 71 CHAPTER 5 No Hammer, No House: The Tools of the Trader 89 CHAPTER 6 Thomas More’s Revenge: A Strategy for All Seasons 100 CHAPTER 7 Apocalypse Never: The Uses of Defense 122 CHAPTER 8 Don’t Just Stand There, Do Something: The Straddle 146 v vi Contents CHAPTER 9 Don’t Just Do Something, Stand There: The Strangle 168 CHAPTER 10 Hi-Yo, Yogi! Riding the Bear 188 CHAPTER 11 The King of Strategies: The Martian Ratio-Spread 207 CHAPTER 12 Every Once in a While: The Picador 226 CHAPTER 13 Pay Me after Lunch: The Endplay 238 CHAPTER 14 Filling in the Cracks: Ideas, Understanding, and Winning 252 APPENDIX A Studies of Historical Gross Movement in Selected Markets, 1990–2002 263 APPENDIX B Distribution of Contract Highs and Lows in Selected Markets, 1980–2002 280 Index 297 Preface here are thousands of books about trading. Some books approach trad- ing as an exercise in mathematics and focus on effective ways to turn Tthe mathematics of the marketplace into a profit-generation machine. Some approach trading as an exercise in psychology and tactics, attempting to generate profit from a correct understanding and appreciation of what the other traders in the market are doing. Some are catalogues of strategies. Some apply economic, statistical, or logical principles to trading in the mar- ketplace. Some are practical guides to the minutiae of markets. This book either fits into none of those categories or is a mixture of all of them with several other topics included. I’m not sure which. What it is, at bottom, is my understanding of the whats, hows, and whys of earning a trad- ing profit, acquired over 30 years of trading in all sorts of markets (all sorts— remind me to tell you sometime about the great caviar-for-condoms caper). I didn’t become a steadily profitable trader until I came to understand some of the assumptions and conditions that underlie markets and to figure out certain practical and usually effective ways to combat the assorted risks that markets present; in short, to learn to deal effectively with the nature of the beast. This book is informal, because I’m an informal guy. There’s almost noth- ing I like better than talking with other traders about trading, and so the text is written in a generally conversational style. We will crunch a few numbers on occasion, to clarify various topics and as an aid in looking at practical examples of trading, but there are no formal mathematical demonstrations at all in this book for two very good reasons. First, a number of fine analysts and remarkable scholars have published extensive compilations of the mathematics involved in quantitative analy- sis, numerical methods, and risk and price modeling, and there’s no point whatever in even attempting to replicate their efforts. A motto of mine is, “Always go to the best source available,” which is usually the original author. Who wants to read a rewrite of someone else’s work, anyway, particularly a very good original work? Can you even imagine Hamlet as rewritten by, say, Danielle Steele? Ghastly thought. vii

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