Buy and Hedge: The 5 Iron Rules for Investing Over the Long Term (Shanette Luellen's Library) by Jay Pestrichelli & Wayne Ferbert

Author:Jay Pestrichelli & Wayne Ferbert
Language: eng
Format: epub
Publisher: FT Press
Published: 2012-10-20T16:00:00+00:00

Chapter Lessons

• Option holders can be long or short.

• Option chains are used to access price quotes for Options contracts.

• ITM calls have a strike price below the current market, and ITM puts have a strike price above the current market.

• OTM calls have a strike price above the market, and OTM puts have a strike price below the market.

18. Understanding and Using Options

“I guess that was your accomplice in the wood chipper.”

—Marge Gunderson (played by Frances McDormand) in Fargo (1996)

Just a gentle reminder that there are two sides to every option trade. The value that options command isn’t as unpredictable as a staged kidnapping like Fargo, but nonetheless, there are winners and losers in every trade. Being aware of how options are valued is important to know before using them as a hedging vehicle and keeping you out of the wood chipper.

As discussed in Chapter 16, “What Is an Option?,” the investor can use Options in many ways to create an investment bias. This flexibility allows you to fine-tune your approach and create the most cost-effective set of positions. To understand how this is done, you must understand where Option valuations come from and what they mean.

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