Contents Series Title Page Copyright Dedication Preface THE PHENOMENA THE GOAL THE STRATEGIES THE TAKEAWAYS JUST ONE EQUATION ABOUT THE WEBSITE GETTING STARTED IN OPTION TRADING ACKNOWLEDGMENTS PART ONE: THE BASICS CHAPTER 1: The Basics OPTION SPECIFICS DESCRIBING AN OPTION OPTION COST AND VALUE HOW TIME VALUE CHANGES DOING THE SAME FOR PUTS MONEYNESS CHAPTER 2: Direction, Magnitude, and Time MAGNITUDE AND TIME ARE RELATED UP AND DOWN AREN’T THE ONLY POSSIBILITIES THE PATH MATTERS VOLATILITY COMBINES THESE ISSUES CHAPTER 3: Volatility RISK IS VOLATILITY INVESTORS DEMAND A RISK PREMIUM, REDUCING THE PRICE OF RISKY ASSETS VOLATILITY IS THE STANDARD DEVIATION OF RETURNS STANDARD DEVIATION TELLS US WHAT RANGE OF OUTCOMES TO EXPECT STANDARD DEVIATION OF RETURNS IS VOLATILITY TYPES OF VOLATILITY CHAPTER 4: Option Pricing Models and Implied Volatility IT’S AN OPTION PRICING MODEL, NOT AN EQUATION FOR OPTION VALUES A BLACK-SCHOLES EXAMPLE THE ASSUMPTIONS INPUTS TO THE BLACK-SCHOLES OPTION PRICING MODEL IMPLIED VOLATILITY THE SENSITIVITY OF OPTION PRICES TO CHANGES IN THE INPUTS PART TWO: THE PHENOMENA CHAPTER 5: The Volatility Risk Premium VOLATILITY RISK PREMIUM, THE WHAT THE ASSUMPTIONS, THE WHY OF THE VOLATILITY RISK PREMIUM THE VOLATILITY RISK PREMIUM—HOW MUCH HOW TO THINK ABOUT THE VOLATILITY RISK PREMIUM THE VOLATILITY RISK PREMIUM BY ASSET CLASS THE VOLATILITY RISK PREMIUM OVER TIME CHAPTER 6: Implied Volatility and Skew IMPLIED VOLATILITY BY STRIKE PRICE OPTION SKEW, THE WHEN OPTION SKEW, THE WHERE Assumptions, the First WHY of Option Skew ASSUMPTIONS AND OTHER REASONS DETERMINING IF ONE OPTION IS A GOOD HEDGE FOR ANOTHER OPTION SKEW, THE HOW MUCH CHAPTER 7: Time Value and Decay TIME VALUE BY STRIKE PRICE THETA—THE MEASURE OF DAILY OPTION TIME VALUE EROSION OPTION PRICE EROSION DOESN’T HAPPEN IN A STRAIGHT LINE OPTION PRICE EROSION, THE WHAT ANOTHER WAY OF LOOKING AT DAILY EROSION WHAT DO WE MEAN BY “THE MARKET”? MARKET MAKERS BID/ASK SPREAD, THE WHAT DELTA’S IMPACT ON BID/ASK SPREADS WIDER BID/ASK SPREADS THE BID/ASK SPREAD WHEN THERE’S MORE COMPETITION EQUITY OPTIONS THE BID/ASK FOR OPTION SPREADS THE BID/ASK OF MULTI-LEGGED SPREADS WHAT’S THE REAL FAIR VALUE OF AN OPTION BASED ON THE BID/ASK? CHAPTER 9: Volatility Slope THE CORRELATION BETWEEN MARKET PRICES AND IMPLIED VOLATILITY THE VOLATILITY SLOPE, THE WHY THE ASYMMETRY VOLATILITY SLOPE AND SKEW ARE RELATED \ PART THREE: THE TRADES CHAPTER 10: Covered Calls COVERED CALLS ARE BEST FOR STOCKS YOU ALREADY OWN AND WANT TO KEEP THE PHENOMENA AND COVERED CALLS BREAKEVEN POINTS BREAKEVEN POINTS AND RATES OF RETURN USING COVERED CALLS FOR DOWNSIDE PROTECTION IF OUR STOCK RALLIES SELECTING THE COVERED CALL COVERED CALLS AND DAILY PRICE EROSION COVERED CALLS AND THE VOLATILITY RISK PREMIUM PLACING YOUR COVERED CALL ORDER FOLLOW-UP ACTION GETTING ASSIGNED ROLLING CHAPTER 11: Selling Puts SELLING PUTS IS BEST FOR STOCKS YOU WANT TO OWN AT A DISCOUNT THE PHENOMENA SELLING PUTS IS IDENTICAL TO A BUYWRITE SELLING PUTS TO BUY STOCK AT A DISCOUNT ROLLING CHAPTER 12: Calendar Spreads MAXIMUM PROFIT AND LOSS THE PHENOMENA LONG CALENDAR SPREADS AND IMPLIED VOLATILITY CALENDAR SPREAD PAYOFF AT FRONT-MONTH EXPIRATION NEUTRAL, BULLISH, AND BEARISH CALENDAR SPREADS CALENDAR SPREAD PROFITABILITY WITHOUT MOVEMENT CALENDAR SPREAD SENSITIVITIES FOLLOW-UP BULLISH BECOMES BEARISH… CATALYSTS CHAPTER 13: Risk Reversal A RISK REVERSAL AND SKEW WHEN TO USE A RISK REVERSAL USING A RISK REVERSAL RISK REVERSALS PRIOR TO EXPIRATION WHEN A RISK REVERSAL DOESN’T WORK RISK REVERSALS AND LONGER-DATED EXPIRATIONS FOLLOW-UP ACTION CHAPTER 14: Vertical Spreads BREAKEVENS SKEW AND VERTICAL SPREADS VERTICAL SPREAD RISK AND REWARD LONG PUT SPREADS AND SHORT CALLS SPREADS ARE ALIKE LONG PUT SPREADS AND SHORT CALL SPREADS ARE DIFFERENT THE WIDTH OF THE SPREAD VERSUS THE COST THE GREEKS IMPLIED VOLATILITY AND THE COST OF VERTICAL SPREADS VERTICAL SPREADS—HOW AGGRESSIVE? CALL SPREADS, SKEW, AND THE PROBLEM OF THE “TROUGH” FOLLOW-UP ACTION APPENDIX STANDARD DEVIATION REALIZED VOLATILITY VOLATILITY FOR DIFFERENT TIME PERIODS THE BLACK-SCHOLES FORMULA EXTENDED, PUTS AND THE GREEKS LINEAR INTERPOLATION ANNUALIZING YIELD Index 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 customer's 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 the reader is 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, visit our Web site at www.WileyFinance.com.