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Overview
Master option trading, visually, hands-on -- and discover the powerful, easy-to-use OVI indicator that leads the market, revealing what the world's savviest option traders are doing right now! Learn option trading from the newest edition of Guy Cohen's international best-seller Options Made Easy, which has earned a worldwide reputation for its simplicity, clarity and hands-on practicality. With outstanding graphics for step-by-step learning, this easy tutorial packed with real trades is designed to reinforce every new trader's learning experience.
Using plain English and clear illustrations to explain each key trading strategy, Cohen avoids complex math while effortlessly delivering the practical knowledge traders need. Now, in this eagerly-anticipated Third Edition, Cohen updates all examples and data, utilizing the market's new option symbols throughout, and presenting a more streamlined, focused, and up-to-date review of relevant chart patterns and technical analyses. Most important, he thoroughly introduces his breakthrough OVI indicator, revealing how it captures the implications of actual option transaction data, and presents signals even beginners can use to earn consistent profits. Step by step, Cohen walks traders through:
- Filtering for stocks and selecting the right strategy for each situation
- Implementing proven strategies for income, including covered calls and bull put spreads
- Trading volatility through straddles and strangles
- Using butterflies and condors to trade rangebound markets
- Understanding trading psychology and its impact on option trades
- And much more
Product Details
| ISBN-13: | 9780133087932 |
|---|---|
| Publisher: | Pearson Education |
| Publication date: | 04/22/2013 |
| Sold by: | Barnes & Noble |
| Format: | eBook |
| Pages: | 368 |
| Sales rank: | 755,113 |
| File size: | 34 MB |
| Note: | This product may take a few minutes to download. |
About the Author
Guy specializes in trading stock and options, with his hallmark being his user-friendly approach and liberal use of illustrations. With Guy, you will find proven techniques to succeed, complemented by industry-leading customer service.
An established and entertaining speaker, Guy has an MBA (finance) from City University (Cass) Business School, London.
Guy is also the author of Your Gut Feeling, which is a self-help autobiography that outlines his complete recovery from a severe case of ulcerative colitis.
For more information about Guy’s trading products, go to http://www.ovitradersclub.com.
Read an Excerpt
Preface
This book can be used by any options trader, although it is fair to say that it is most specifically targeted toward novices and intermediates. Simplicity is the name of the game here, and I have made it my mission to enable anyone and everyone to learn and apply the benefits of options trading simply and easily. By giving you a grounding that is second to none, we look to give you the solid foundations required to give you the confidence to enable you to become a dynamic and successful trader. And we want it to be a fun and pleasurable experience too!
You'll find during the course of this book that much of the teaching is done through use of charts and diagrams. Even the "non-visual" among you will appreciate the power of this approach. Options is frequently taught as a stodgy, theoretical subject, and I have often been bewildered as to how people can "teach" this fascinating area of finance without the use of a single chart, diagram, or illustration. So much of my own knowledge is based on the understanding of simple diagrams.
You'll also discover that I ask you the reader lots of questions during this book. It's a technique I also use during my other teaching. Learning is at its best when it is interactive. So get ready to have some fun while learning at a rate and speed that you couldn't have imagined possible before now. The writing style is as close to a relaxed speaking style as possible.
Another important aspect of this book is that the examples we use are designed to facilitate your learning experience. You'll discover that we don't try to make this too much of a mathematical obstacle course for you. The numbers are reasonably straightforward because we want to keep your focus honed on the specific learning points; besides, there are software products that will help you with the math anyway. Even now I still use my own OptionEasy application just to be sure before I place any spread trade.
People often ask me how I got involved in options trading and training. Well, with my commercial real estate background, I'd always had a passion for finance and during an enforced sabbatical in 1995, I decided that once I had fully recovered I would pursue all the things in life that terrified me! That included a finance MBA at City University Business School, and once there it meant opting for the options specialist module. I was completely hooked, and that was the advent of the OptionEasy software package, initially just for my own benefit.
That doesn't quite tell the whole story. Just weeks before taking the options exam I could barely explain the difference between a call and a put! However, by the time I got into the exam room I had brought my knowledge level from zero to getting over 80% in the exam, the fifth highest mark in a big class. As you'll see later, though, learning the academic material did not necessarily prepare me for the practicality of actual trading....
In the meantime, during those frantic weeks of revision, I developed the silliest and most outrageous techniques for learning about options in simple and eccentric ways. I drew pictures in my mind, invented silly phrases and used "junko" logic to piece things together. The way I learned is now the way I teach. It's a little unusual, but it's fun, fast, and highly effective. No one forgets what a call and a put is when I teach them. And because we build everything on such solid foundations, you'll find that the OptionEasy way is the simplest, most effective, and fastest way of learning about options. Wherever a picture can be used to explain even the most complex of topics, we use it and combine it with the logic too. We are constantly and simultaneously using different techniques to facilitate the learning process. If you don't remember the logic, then you will remember the picture; if you don't remember the picture, then you will remember the logic. Either way, you'll learn....
Now, when I finally got around to making my first options trades, I did so with the typical trepidation of someone who had learned the academic material first. For my first-ever spread trade, I placed my order and then created a little spreadsheet to calculate the risk and reward of my trade. I was horrified to find that my maximum reward for this trade was precisely ZERO! I immediately cancelled the order (which hadn't yet been filled) and concluded that if I could make that kind of mistake then perhaps a few others could be doing just that same thing...without even knowing it! Hence was born the OptionEasy software application.
Chapter 1 is a step-by-step introduction into the world of options. It's important that you follow the examples of the Risk Profile Charts and understand these simple diagrams. The Risk Profile Chart is remarkably straightforward but is undoubtedly the cornerstone to your entire understanding of options. Even intermediates should pay attention to this part of the book. You'll find yourself understanding far more than you thought was possible, so I challenge you to go through this section, even if it only takes you a few minutes.
Chapter 2 takes us into the marketplace. A common question I get asked is, "If I buy a stock option at $2.50, why do I have to pay $250.00 for it?" The answer to this question is easy but needs to be understood. We also take you through some real-life examples to get you acclimatized to trading.
Chapter 3 is about Fundamental Analysis. This is what the "analysts" work on. In other words, the health of the company, its assets, liabilities, turnover, cash flow, profits, and so on. In the long term, markets always revert to the fundamental health of individual companies; however, as we've so recently witnessed (not for the first time), in the short term it can be all about hype in either direction and human behavior en masse. How else can you explain PE ratios in excess of 100 times projected net earnings? People will say, "Well, did you look at the growth rate of that company?" Yes, I did, and very few companies can sustain that kind of absurd valuation for long simply because not many organizations can continue to grow at absurd levels for very long. At the end of the chapter is a list of news events and Fundamental Analysis headings that you need to be aware of if you're a long-term trader.
Chapter 4 runs through some basic and well-known concepts of Technical Analysis and chart reading. This book is not intended to be an authority on charting, so it is left as brief as possible; however, you do need to be able to appreciate the rudiments of Technical Analysis so you can readily apply the appropriate strategy to the prevailing trading conditions. Entire books are dedicated to single areas of Technical Analysis, so, while this chapter is a useful summary, please undertake to do more work in this area. I stick to a couple of Technical Analysis techniques for my trading, and it suits both my personality and psychology to do it that way. Numbers don't daunt me, so I take a more mathematical and numerical approach to my Technical Analysis. My approach doesn't suit everyone, but it's clean and clear.
Chapters 5, 7, 8, and 9 take us through some simple options spread strategies and how to do them correctly and with minimal risk. It's important to always follow the rules. By all means make up your own if you like, but always stick to the rules you adopt. And if the rules you invent or adopt are bad ones, then change them or stick to the ones here. They're designed to be easy to understand and to keep you out of serious trouble!
In Chapter 6 we discuss the "Greeks." These are simply "sensitivities" to various factors affecting the pricing of options. From your point of view as traders, these sensitivities have consequences for your trading. We show you what the Greeks are, what their consequences are, and how to prepare for or ensure against them.
Chapter 10 is about trading psychology...you'll find as you gain experience that many lessons in trading life generally are ones where it's the intensity of the experience that is the greatest teacher. How many of us have let profits slide by because we fell in love with a stock and wouldn't sell it before it reached $XXX.00? And for some reason it never quite got to $XXX.00 and we still never sold...even when we'd been in massive profit! I have tried most of the strategies contained within the OptionEasy software application—we try not to tell people what to do, but to give you an informed choice. You can have real choice only when you are armed with the tools to make that choice. It's our job here to arm you with those tools, via our teachings, our applications, and our experience.
Over the course of my trading career so far, I have been fortunate to experience incredible highs and some pretty awful lows too! Luckily the lows entailed me giving a portion of profits back to the market (as opposed to my being wiped out), and the highs happened before the lows! As a result of all this, I have developed practical concepts on how we can stick to our trading discipline whatever our rules may be. My job here is to take you through my experiences and make it as painful for you as it was for me. For example, my worst ever trading day was the day that I finally implemented the rule on stops. And that was it. I would never fail to implement stops again because the experience was so intense. Alas, I had given back over 50% of my gains to learn this invaluable lesson, but at least my returns were still in the 100s of percent at that stage! And it felt wonderful to apply one of the golden rules of trading at such an intensely bad time.
Chapter 11 is where we bundle everything together and create coherent sample trading plans, so you're armed to get out there and put everything into practice. This book is not about theory; it's about being armed in a practical sense. We don't spend time on strategies that sound great but can only be used by the professionals in reality. We concentrate on what you can do in the real world, accepting both our opportunities and the minor limitations we have in being private investors and traders.
Finally, Chapter 12 runs through some of the implications of the introduction of Stock Futures and the impact that it might have for stock and options traders.
We aim to make this an enjoyable experience for you as you find yourself learning dynamically and interactively as you go through the examples and illustrations. Trading stocks and options is fun but it's also a serious business. Some of the most successful traders I know stick to just one or two strategies. With OptionEasy we want to give you the choice of whatever strategy suits your trading style and individual psychology.
Enjoy the reading, enjoy the learning, and enjoy the fact that this is only a stepping stone for you on your journey to gain as much knowledge as you possibly can in this arena. The issue is not that there's not enough education in the trading world—there's actually too much. But where's the wheat and where's the chaff? The challenge is for you to find not only what suits you, but also to distinguish between the evangelical types who tell you how rich you're going to become with their "amazing new proprietary techniques" while you actually line their pockets and the serious educators out there who are honest enough to tell you that it's actually up to you. This isn't supposed to be an easy game. You can do it, but don't be fooled into thinking that it's going to take one book or one seminar. This has to become a hobby for you, one that you'll enjoy and one that's a continuing challenge. The truest thing I know about trading is that the learning never stops. It's incessant and compelling. It's best to avoid people promising you ludicrous returns per month and "guaranteed" results with no effort on your part. If it looks too good to be true, it usually is! Having said that, you can make trading and investing an unusually predictable and successful vocation by your own efforts, enthusiasm, and discipline.
© Copyright Pearson Education. All rights reserved.
Table of Contents
Acknowledgements ix
About the Author xi
Executive Summary xii
Preface xiii
Chapter 1: Introduction to Options 1
Chapter 2: Into the Marketplace 27
Chapter 3: The Basics of Fundamental Analysis 47
Chapter 4: The Basics of Technical Analysis 81
Chapter 5: Two Popular Strategies and How to Improve Them 139
Chapter 6: An Introduction to the Greeks 165
Chapter 7: Bull Call Spreads and Bull Put Spreads 197
Chapter 8: Two Basic Volatility Strategies 219
Chapter 9: Two Basic Sideways Strategies 237
Chapter 10: Trading and Investing Psychology 261
Chapter 11: Putting It All Together--A Call to Action 277
Chapter 12: Trading with the OVI 287
Appendix I: Strategy Table 313
Appendix II: Glossary 325
References and Recommended Reading 339
Index 341
Preface
This book can be used by any options trader, although it is fair to say that it is most specifically targeted toward novices and intermediates. Simplicity is the name of the game here, and I have made it my mission to enable anyone and everyone to learn and apply the benefits of options trading simply and easily. By giving you a grounding that is second to none, we look to give you the solid foundations required to give you the confidence to enable you to become a dynamic and successful trader. And we want it to be a fun and pleasurable experience too!
You'll find during the course of this book that much of the teaching is done through use of charts and diagrams. Even the "non-visual" among you will appreciate the power of this approach. Options is frequently taught as a stodgy, theoretical subject, and I have often been bewildered as to how people can "teach" this fascinating area of finance without the use of a single chart, diagram, or illustration. So much of my own knowledge is based on the understanding of simple diagrams.
You'll also discover that I ask you the reader lots of questions during this book. It's a technique I also use during my other teaching. Learning is at its best when it is interactive. So get ready to have some fun while learning at a rate and speed that you couldn't have imagined possible before now. The writing style is as close to a relaxed speaking style as possible.
Another important aspect of this book is that the examples we use are designed to facilitate your learning experience. You'll discover that we don't try to make this too much of a mathematical obstacle course for you. The numbers are reasonably straightforward because we want to keep your focus honed on the specific learning points; besides, there are software products that will help you with the math anyway. Even now I still use my own OptionEasy application just to be sure before I place any spread trade.
People often ask me how I got involved in options trading and training. Well, with my commercial real estate background, I'd always had a passion for finance and during an enforced sabbatical in 1995, I decided that once I had fully recovered I would pursue all the things in life that terrified me! That included a finance MBA at City University Business School, and once there it meant opting for the options specialist module. I was completely hooked, and that was the advent of the OptionEasy software package, initially just for my own benefit.
That doesn't quite tell the whole story. Just weeks before taking the options exam I could barely explain the difference between a call and a put! However, by the time I got into the exam room I had brought my knowledge level from zero to getting over 80% in the exam, the fifth highest mark in a big class. As you'll see later, though, learning the academic material did not necessarily prepare me for the practicality of actual trading....
In the meantime, during those frantic weeks of revision, I developed the silliest and most outrageous techniques for learning about options in simple and eccentric ways. I drew pictures in my mind, invented silly phrases and used "junko" logic to piece things together. The way I learned is now the way I teach. It's a little unusual, but it's fun, fast, and highly effective. No one forgets what a call and a put is when I teach them. And because we build everything on such solid foundations, you'll find that the OptionEasy way is the simplest, most effective, and fastest way of learning about options. Wherever a picture can be used to explain even the most complex of topics, we use it and combine it with the logic too. We are constantly and simultaneously using different techniques to facilitate the learning process. If you don't remember the logic, then you will remember the picture; if you don't remember the picture, then you will remember the logic. Either way, you'll learn....
Now, when I finally got around to making my first options trades, I did so with the typical trepidation of someone who had learned the academic material first. For my first-ever spread trade, I placed my order and then created a little spreadsheet to calculate the risk and reward of my trade. I was horrified to find that my maximum reward for this trade was precisely ZERO! I immediately cancelled the order (which hadn't yet been filled) and concluded that if I could make that kind of mistake then perhaps a few others could be doing just that same thing...without even knowing it! Hence was born the OptionEasy software application.
Chapter 1 is a step-by-step introduction into the world of options. It's important that you follow the examples of the Risk Profile Charts and understand these simple diagrams. The Risk Profile Chart is remarkably straightforward but is undoubtedly the cornerstone to your entire understanding of options. Even intermediates should pay attention to this part of the book. You'll find yourself understanding far more than you thought was possible, so I challenge you to go through this section, even if it only takes you a few minutes.
Chapter 2 takes us into the marketplace. A common question I get asked is, "If I buy a stock option at $2.50, why do I have to pay $250.00 for it?" The answer to this question is easy but needs to be understood. We also take you through some real-life examples to get you acclimatized to trading.
Chapter 3 is about Fundamental Analysis. This is what the "analysts" work on. In other words, the health of the company, its assets, liabilities, turnover, cash flow, profits, and so on. In the long term, markets always revert to the fundamental health of individual companies; however, as we've so recently witnessed (not for the first time), in the short term it can be all about hype in either direction and human behavior en masse. How else can you explain PE ratios in excess of 100 times projected net earnings? People will say, "Well, did you look at the growth rate of that company?" Yes, I did, and very few companies can sustain that kind of absurd valuation for long simply because not many organizations can continue to grow at absurd levels for very long. At the end of the chapter is a list of news events and Fundamental Analysis headings that you need to be aware of if you're a long-term trader.
Chapter 4 runs through some basic and well-known concepts of Technical Analysis and chart reading. This book is not intended to be an authority on charting, so it is left as brief as possible; however, you do need to be able to appreciate the rudiments of Technical Analysis so you can readily apply the appropriate strategy to the prevailing trading conditions. Entire books are dedicated to single areas of Technical Analysis, so, while this chapter is a useful summary, please undertake to do more work in this area. I stick to a couple of Technical Analysis techniques for my trading, and it suits both my personality and psychology to do it that way. Numbers don't daunt me, so I take a more mathematical and numerical approach to my Technical Analysis. My approach doesn't suit everyone, but it's clean and clear.
Chapters 5, 7, 8, and 9 take us through some simple options spread strategies and how to do them correctly and with minimal risk. It's important to always follow the rules. By all means make up your own if you like, but always stick to the rules you adopt. And if the rules you invent or adopt are bad ones, then change them or stick to the ones here. They're designed to be easy to understand and to keep you out of serious trouble!
In Chapter 6 we discuss the "Greeks." These are simply "sensitivities" to various factors affecting the pricing of options. From your point of view as traders, these sensitivities have consequences for your trading. We show you what the Greeks are, what their consequences are, and how to prepare for or ensure against them.
Chapter 10 is about trading psychology...you'll find as you gain experience that many lessons in trading life generally are ones where it's the intensity of the experience that is the greatest teacher. How many of us have let profits slide by because we fell in love with a stock and wouldn't sell it before it reached $XXX.00? And for some reason it never quite got to $XXX.00 and we still never sold...even when we'd been in massive profit! I have tried most of the strategies contained within the OptionEasy software application—we try not to tell people what to do, but to give you an informed choice. You can have real choice only when you are armed with the tools to make that choice. It's our job here to arm you with those tools, via our teachings, our applications, and our experience.
Over the course of my trading career so far, I have been fortunate to experience incredible highs and some pretty awful lows too! Luckily the lows entailed me giving a portion of profits back to the market (as opposed to my being wiped out), and the highs happened before the lows! As a result of all this, I have developed practical concepts on how we can stick to our trading discipline whatever our rules may be. My job here is to take you through my experiences and make it as painful for you as it was for me. For example, my worst ever trading day was the day that I finally implemented the rule on stops. And that was it. I would never fail to implement stops again because the experience was so intense. Alas, I had given back over 50% of my gains to learn this invaluable lesson, but at least my returns were still in the 100s of percent at that stage! And it felt wonderful to apply one of the golden rules of trading at such an intensely bad time.
Chapter 11 is where we bundle everything together and create coherent sample trading plans, so you're armed to get out there and put everything into practice. This book is not about theory; it's about being armed in a practical sense. We don't spend time on strategies that sound great but can only be used by the professionals in reality. We concentrate on what you can do in the real world, accepting both our opportunities and the minor limitations we have in being private investors and traders.
Finally, Chapter 12 runs through some of the implications of the introduction of Stock Futures and the impact that it might have for stock and options traders.
We aim to make this an enjoyable experience for you as you find yourself learning dynamically and interactively as you go through the examples and illustrations. Trading stocks and options is fun but it's also a serious business. Some of the most successful traders I know stick to just one or two strategies. With OptionEasy we want to give you the choice of whatever strategy suits your trading style and individual psychology.
Enjoy the reading, enjoy the learning, and enjoy the fact that this is only a stepping stone for you on your journey to gain as much knowledge as you possibly can in this arena. The issue is not that there's not enough education in the trading world—there's actually too much. But where's the wheat and where's the chaff? The challenge is for you to find not only what suits you, but also to distinguish between the evangelical types who tell you how rich you're going to become with their "amazing new proprietary techniques" while you actually line their pockets and the serious educators out there who are honest enough to tell you that it's actually up to you. This isn't supposed to be an easy game. You can do it, but don't be fooled into thinking that it's going to take one book or one seminar. This has to become a hobby for you, one that you'll enjoy and one that's a continuing challenge. The truest thing I know about trading is that the learning never stops. It's incessant and compelling. It's best to avoid people promising you ludicrous returns per month and "guaranteed" results with no effort on your part. If it looks too good to be true, it usually is! Having said that, you can make trading and investing an unusually predictable and successful vocation by your own efforts, enthusiasm, and discipline.
© Copyright Pearson Education. All rights reserved.