spine 15.5 mm A beginner’s guide to trading options for success Options Made Simple is the essential guide for anyone who wants to learn about options trading, without all the fuss. Options are a fexible trading tool that can be used in a wide range of strategies. Options They suit all investors, whether bold or risk-averse. In Options Made Simple you will discover how options trading works and develop the knowledge and strategies to implement your own options trading plan successfully. Inside you’ll fnd information on: ➤ types of options and how they can be traded ➤ advantages and disadvantages of options trading SIMPLE, EASY TO UNDERSTAND ➤ how to buy, sell and exercise options STRATEGIES ANYONE CAN USE FOR SUCCESS! ➤ how to choose the right option strategy for you ➤ option strategies that reduce risk ➤ option strategies for generating profts ➤ using multiple options in advanced strategies. If you’re ready to trade options and maximise your success without all the stress, this is the book for you. Jacqueline Clarke is a qualifed accountant and a trader of shares and derivatives. Together with Davin, Jacqueline manages their extensive trading business as their primary source of income. Davin Clarke is a well-known and highly successful private trader. He is a popular and sought-after speaker and has featured in several books, including The Wiley Trading Guide and 20 Most Common Trading Mistakes and How You Can Avoid Them. He co-authored Trading Plans Made Simple with Jacqueline Clarke. Jacqueline Clarke & Davin Clarke www.wiley.com AU$27.95 NZ$31.99 Authors of Trading Plans Made Simple TRADING Options Made Simple Final.indd 1-3 29/08/11 5:45 PM Options Clarke FM.indd 2 8/25/2011 8:47:00 AM Options FM.indd 1 8/25/2011 8:47:00 AM FM.indd 2 8/25/2011 8:47:00 AM A beginner’s guide to trading options for success Options Jacqueline Clarke & Davin Clarke FM.indd 3 8/25/2011 8:47:00 AM First published in 2012 by Wrightbooks an imprint of John Wiley & Sons Australia, Ltd 42 McDougall St, Milton Qld 4064 Office also in Melbourne Typeset in Berkeley LT 11.5/13.4 pt © Jacqueline Clarke 2012 The moral rights of the author have been asserted National Library of Australia Cataloguing-in-Publication data: Author: Clarke, Jacqueline. Title: Options made simple : a beginner’s guide to trading options for success / Jacqueline and Davin Clarke. ISBN: 9780730376378 (pbk.) Notes: Includes index. Subjects: Options (Finance) Other Authors/Contributors: Clarke, Davin. Dewey Number: 332.6453 All rights reserved. Except as permitted under the Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All inquiries should be made to the publisher at the address above. Cover images and design by Peter Reardon, Pipeline Design <www.pipelinedesign. com.au> Printed in Australia by Ligare Book Printer 10 9 8 7 6 5 4 3 2 1 Disclaimer The material in this publication is of the nature of general comment only, and does not represent professional advice. It is not intended to provide specific guidance for particular circumstances and it should not be relied on as the basis for any decision to take action or not take action on any matter which it covers. Readers should obtain professional advice where appropriate, before making any such decision. To the maximum extent permitted by law, the author and publisher disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based on the information in this publication. FM.indd 4 8/25/2011 11:48:16 AM Contents About the authors vii 1 What are options? 1 2 Advantages and risks 15 3 Types of options 29 4 Option pricing 45 5 The mechanics: how to buy, sell and exercise options 67 6 Buying options: the scenarios 79 7 Selling options: the scenarios 97 8 Choosing your option strategy 115 9 Strategies for buying call options 123 10 Strategies for buying put options 137 11 Strategies for selling covered call options 155 12 Strategies for selling naked call options 175 13 Strategies for selling put options 189 v FM.indd 5 8/29/2011 6:51:10 AM 14 Advanced strategies: using multiple option spreads 201 15 Advanced strategies: straddles and strangles 221 Appendix 233 Glossary 237 Index 241 vi FM.indd 6 8/25/2011 8:47:00 AM About the authors Jacqueline Clarke is a private trader, chartered accountant and author of Trading Plans Made Simple. Together with Davin Clarke, she has over 10 years’ experience in managing their private business, trading equities, options, warrants, futures and currencies. As a trader and accountant, Jacqueline has a unique understanding of risk management, trade management and how to successfully trade to produce a source of income. Davin Clarke is principal of Tzar Corp and is a successful full- time private trader. Davin has earned his primary income from trading since 2000, and has a first-hand understanding of what it takes to trade full time. Davin provides a limited number of trading skills workshops through Tzar Corp for equities, futures and options traders. Davin is regularly sought for speaking engagements and is featured in a number of books, including The Wiley Trading Guide, 20 Most Common Trading Mistakes and How You Can Avoid Them and Real Traders, Real Money, Real Lives. vii FM.indd 7 8/25/2011 8:47:00 AM FM.indd 8 8/25/2011 8:47:00 AM