Guide to Investing Options [Options Clearing Corporation]

1. Basics: When you purchase an option –> Long position 
    Write an option –> Short position 

2. Set your Strategy 
    – Want more Income –> write Covered Calls
    – Protect the value of the stocks that you own 
                   – Purchase Puts
                   – Purchase options on an Index that tracks the type of stocks in my portfolio 
the more time until expiration, the higher the option premium, because the chance of reaching strike price is greater 

Option Strategies

Option Strategies

3. Make a commitment on Exit Strategy or Cut off Time

4. Do Your Research
– Option value depends on the price behaviour of another financial product
– be alert to pending corporate action e.g Splits and mergers

5. Selecting the Right Security

(i) When selecting Securities
– strong financial outlook, growth potential
– pay regular dividends

(ii) When selecting Options
– stock price will rise or fall in a finite period
– by how much

6. Managing your Cash
– use options to complement a diversified investment portfolio 

7. Exiting and Exercise
– if a stock which you wrote begins to move in the opposite direction from what you anticipated, you can close out the position by buying a call in the same series as the one you sold. 
– Alternatively, you can “roll out” i.e. close out the position and write calls with a later expiration

8. Applying Options Information and Analysis
– Using Benchmarks 
          – CBOE Volatility Index (VIX)
          – Compilation of S&P 500 Index Options

– Pricing Models
      – Black Scholes Model
      – Cox Ross Rubenstein Model
      – Whaley Model 

– Indicators 
      – put-call ratio
      – put: (-) indicator. Bearish
      – call: (+) indicator. Bullish

9. Decoding Symbology

Decoding Option Symbols

10. Expiration Cycles 

Option Expiration Cycles

(i) Options are always available for the current month and the following one. e.g. on February 1, you can buy or sell options expiring in February and March for all stocks

those on a stock assigned to the February cycle would be available in May and August 
11. Strategy Screener

Options Strategies

The Options Clearing Corporation

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