[...]... situation, and they fail to understand just what the risk is before they make their trades Jay Kaeppel explains these issues in The Option Trader’s Guide to Probability, Volatility, and Timing Kaeppel covers the basics and then goes on to teach how to trade options And he doesn’t do it with get-rich-quick examples and hyperbole He looks at the options market with a thorough analysis of both the risk and the. .. understand and apply consistently if they hope to succeed in the long run The purpose of this book is to illuminate these concepts and show how to apply them successfully in real-world trading 1 2 The Option Trader’s Guide What Sets This Book Apart The primary focus of this book is not to teach you about options, but rather to teach you how to successfully trade options Having a textbook understanding... Appendix B Option Exchanges, Option Brokers, Option Symbols, and Option Volume Exchanges 255 Brokerage Firms 257 Resources 257 Stock and Stock Index Option Symbols Stock Option Volume Statistics 258 Index 255 258 265 Foreword Novice traders are attracted to the options market because of the degree of leverage and the vision of enhanced profitability it affords them Options, however, are unlike any other... erosion of an Team-Fly® 8 The Option Trader’s Guide option price as time passes and option expiration draws nearer The obvious implication from this graph is that the buyer of this option stands to earn a greater profit if the price of the stock rises sooner rather than later As the price of the option erodes slightly with each passing day due to time decay, a larger price move by the underlying security... 85 call option (from 54 to 134) in Fugure 1.1 The only difference is that the price range along the bottom of the graph has been expanded from 15 points above and below the current price of the stock to 40 points above and below the current price of the stock This range is expanded to illustrate the profit potential available if IBM makes a substantial move in price As you can see, if IBM were to rally... likely to generate a profit Maximum Risk Whenever you buy an option, your risk is limited to whatever price you paid to buy the option In this example the buyer paid $1325 to buy the option You can see by the lowest curve on the graph in Figure 1.1 that the maximum loss will occur if the stock is trading at 80 or lower at the time of option expiration In other words, even if IBM stock fell to 70 or... because of leverage, and more importantly, because of an attribute referred to as time decay Unfortunately, traders learn the hard way that many factors besides calling the market direction correctly come into play in trading options Most traders do not understand implied volatility, time decay, and out-of -the- money versus in -the- money options Many do not have a working knowledge of which option strategies... thing The strategy used in this example is referred to as a synthetic long futures position The trade is established by buying an out-of -the- money call and simultaneously writing an out-ofthe-money put The risk curve depicts the profit or loss for a trader holding this position if the trade is held until option expiration The expected dollar profit or loss is listed down the left side of the graph, and. .. place to start 2 Those who have traded options in the past and did not achieve the type of success they had hoped to Option trading enjoyed explosive growth during the late 1990s and into the start of the new millennium, particularly among individuals Traders whose bankrolls were fattened by the great bull market in stocks fueled part of this growth Having enjoyed great success in the stock market,... made to candy-coat the fact that garnering consistent profits in the options market over a long period is a difficult goal to achieve Can Options Really Be Simplified? Options are by nature fairly complex Not only are there many trading strategies to consider, there also are many different factors that apply to trade selection and position management To complicate things even further, some factors . situation, and they fail to understand just what the risk is before they make their trades. Jay Kaeppel explains these issues in The Option Trader’s Guide to Probability, Volatility, and Timing. . OPTION TRADER’S GUIDE TO PROBABILITY, VOLATILITY, AND TIMING Jay Kaeppel John Wiley & Sons, Inc. Copyright © 2002 by Jay Kaeppel. All rights reserved. Published by John Wiley & Sons, Inc.,. covers the basics and then goes on to teach how to trade options. And he doesn’t do it with get-rich-quick examples and hyperbole. He looks at the options market with a thorough analysis of both the