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Options Trading Primer by Market Wise Trading School

Options Trading Primer by Market Wise Trading School

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\u00a92002 MarketWise Trading School, L.L.C.
1
Options Primer
\u00a92002 MarketWise Trading School, L.L.C.
2
TABLE OF CONTENTS

TABLE OF CONTENTS..................................................................................................1 DISCLAIMER...................................................................................................................5 WHAT IS AN OPTION?..................................................................................................6

OPTION HISTORY.........................................................................................................6
OPTION EXCHANGES...................................................................................................8
THE BASICS...................................................................................................................10

STANDARDIZED OPTIONS.......................................................................................10 100 SHARES.................................................................................................................10 PRICING.......................................................................................................................10 EXPIRATION/EXERCISE...........................................................................................11 SYMBOLOGY..............................................................................................................12 SETTLEMENT..............................................................................................................13 MONINESS...................................................................................................................13 RIGHTSVS OBLIGATION...........................................................................................13 OPENINGAND CLOSING TRANSACTIONS.............................................................14 OPEN INTEREST.........................................................................................................14 OPENING ROTATION.................................................................................................15

CHARTING: PROFIT, LOSS AND PRICING............................................................15
POSITIONS......................................................................................................................16

LONG STOCK..............................................................................................................16 SHORT STOCK............................................................................................................16 LONG CALL.................................................................................................................17 SHORT CALL...............................................................................................................17 LONG PUT....................................................................................................................17 SHORT PUT..................................................................................................................17 SYNTHETICS...............................................................................................................18

PRICING MODELS........................................................................................................20

THE BLACK-SCHOLES MODEL........................................................................................20 THE BINOMIAL MODEL...................................................................................................21 OTHER MODELS USED FOR AMERICAN OPTIONS.............................................................23

Roll, Geske and Whaley.............................................................................................23
Barone-Adesi and Whaley.........................................................................................23
GREEKS...........................................................................................................................23
DELTA..........................................................................................................................24
Position Delta............................................................................................................24
GAMMA........................................................................................................................26
Position Gamma........................................................................................................27
\u00a92002 MarketWise Trading School, L.L.C.
3
VEGA............................................................................................................................28
THETA..........................................................................................................................28
THE GAMEPLAN...........................................................................................................30
PLAN YOUR TRADE THEN TRADE YOUR PLAN..................................................30
BUSINESS BUILDING QUESTIONS.........................................................................32

SHORT TERM TRADING..........................................................................................32 MEDIUM TERM TRADING......................................................................................32 LONGER TERM TRADING......................................................................................32

ACCOUNT MANAGEMENT......................................................................................33
TRADE MANAGEMENT............................................................................................34

Stops based on the Stock Price..................................................................................34 SELLING FOR A PROFIT.........................................................................................35 Set a sell immediately after you buy!.........................................................................35 What to sell for?.........................................................................................................35

TYPES OF CLOSES......................................................................................................35
Exiting On The Upside...............................................................................................36
Exiting On The Downside..........................................................................................36
POSITION STRATEGY.................................................................................................37

COVERD CALL............................................................................................................37 COVERED PUT............................................................................................................39 MARRIED PUTS..........................................................................................................39 MARRIED CALLS.......................................................................................................40 LONG CALLS...............................................................................................................40 LONG PUTS..................................................................................................................41 SPREAD TRADING.....................................................................................................41 DEBIT SPREADS.........................................................................................................42

Bullish Debit Spreads................................................................................................42 Bearish Debit Spreads...............................................................................................42 Horizontal Time Spreads...........................................................................................43 Long Ratio Bear Spread............................................................................................43 Long Ratio Bull Spread.............................................................................................43

CREDIT SPREADS.......................................................................................................44

Bearish Credit Spreads..............................................................................................45 Short Ratio Bull Spread.............................................................................................45 Short Ratio Bear Spread............................................................................................46

SHORT CALL...............................................................................................................46 SHORT PUT..................................................................................................................47 STRADDLES & STRANGLES....................................................................................47

Short Straddle............................................................................................................47 Short Strangle............................................................................................................48 Long Straddle.............................................................................................................48 Long Strangle.............................................................................................................48

COMPLEX STRATEGIES...........................................................................................49
Long Butterfly............................................................................................................49
Short Butterfly............................................................................................................49

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