Practical option strategies for the new post-crisis financial market Traditional buy-and-hold investing has been seriously challenged in the wake of the recent financial crisis. With economic and market uncertainty at a very high level, options are still the most effective tool available for managing volatility and downside risk, yet they remain widely underutilized by individuals and investment managers. In Options for Volatile Markets, Richard Lehman and Lawrence McMillan provide you with specific strategies to lower portfolio volatility, bulletproof your portfolio against any catastrophe, and tailor your investments to the precise level of risk you are comfortable with.
While the core strategy of this new edition remains covered call writing, the authors expand into more comprehensive option strategies that offer deeper downside protection or even allow investors to capitalize on market or individual stock volatility. In addition, they discuss new offerings like weekly expirations and options on ETFs. For investors who are looking to capitalize on global investment opportunities but are fearful of lurking "black swans", this book shows how ETFs and options can be utilized to construct portfolios that are continuously protected against unforeseen calamities.
- A complete guide to the increased control and lowered risk covered call writing offers active investors and traders
- Addresses the changing investment environment and how to use options to succeed within it
- Explains how to use options with exchange-traded funds
Understanding options is now more important than ever, and with Options for Volatile Markets as your guide, you'll quickly learn how to use them to protect your portfolio as well as improve its overall performance.
Table of Contents:
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
About the Authors 206
Index 207
About the Author :
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.
