Options for Volatile Markets / Bloomberg Professional (PDF)

Preface xi INTRODUCTION The "New Normal" in Equity Investing 1 CHAPTER 1 Option Basics 7 What Are Options? 7 Exercise and Assignment 14 Positions 17 How Options Are Traded 19 Options in Your Account 22 CHAPTER 2 Option Pricing and Valuation 25 Option Premium 25 Theoretical Value 27 Time Value 28 Volatility 31 Interest Rates 32 Dividends 32 Calls versus Puts 33 Option Skews and Anomalies 34 CHAPTER 3 The Basics of Covered Call Writing 37 Requirements for "Valid" Covered Writes 38 Risk/Reward of a Covered Write 39 Calculating Potential Returns 46 Major Factors Affecting Call-Writing Returns 48 Covered Writing as an Ongoing Strategy 54 Summing Up Covered Writing 57 CHAPTER 4 Implementing Covered Call Writing 59 Follow-Up Actions 59 Behavioral Issues 69 Differing Approaches 70 Selecting Calls to Write 77 Risks 80 Basic Tax Rules for Options 81 Summing Up Implementation 84 CHAPTER 5 Advanced Call-Writing Techniques 87 Writing Calls on "Hot" Stocks 88 Tax Deferral Strategies 89 Covered Writing on Margin 90 Covered Writing against Securities Other Than Stock 93 Partial Writing, Mixed Writing, and Ratio Writing 98 Put Writing 103 Expiration Games 106 Option-Stock Arbitrage 108 CHAPTER 6 Basic Put Hedging 111 Put Hedge Basics 111 Advantages 115 Disadvantages 116 Behavioral Implications 123 Put Hedge versus Covered Call 127 Hedging against Catastrophic Risk 129 CHAPTER 7 Advanced Hedging Strategies 131 Put Hedge Follow-Ups 131 Using Put Spreads to Hedge 137 Collars 145 Conclusions on Protective Option Strategies 151 CHAPTER 8 Options on ETFs 153 ETFs in a Nutshell 154 ETF Options 158 Covered Call Writing on ETFs 159 Our Put Hedge and Collar Study on SPY 162 Appendix: Partial List of ETFs with Listed Options 165 CHAPTER 9 Volatility and Volatility Derivatives 171 What Is Volatility? 171 Using VIX as a Market Indicator 173 Volatility Futures 179 Variance Futures 181 The Behavior of VIX Futures 183 VIX Options 191 VIX Option Strategies 199 The Future 204 Acknowledgments 205

RICHARD LEHMAN is the founder of RHL Capital, a registered investment advisor, and a part-time instructor of behavioral finance and options at UC Berkeley Extension. He is also the author of Far From Random, and publishes an investment newsletter called the Channelist. Lehman's financial career spans more than thirty years in product management, marketing, sales, and investment management beginning with an eleven-year stint on Wall Street with E.F. Hutton & Co., Thomson McKinnon Inc., and the New York Stock Exchange.

LAWRENCE G. MCMILLAN is the founder and President of McMillan Analysis Corporation. He authors the Daily Volume Alerts, a unique daily service that selects short-term stock trades by looking for unusual increases in equity option volume. McMillan manages option-oriented accounts for individual investors and also publishes the Option Strategist, a derivative products newsletter covering equity, index, and futures options. McMillan's web site, www.optionstrategist.com, twice received a "Best of the Web" award from Forbes magazine. He is the coauthor, with Richard Lehman, of the first edition of this book and the author of McMillan on Options (Wiley) and Options as a Strategic Investment.

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