Options as a Strategic Investment, 4th edition – Lawrence G. McMillan

Chapter 1 – Definitions

• Elementary Definitions
• Factors Influencing the Price of an Option
• Exercise and Assignment: The Mechanics
• The Options Markets
• Option Symbology
• Details of Option Trading
• Order Entry
• Profits and Profit Graphs

Chapter 2 – Covered Call Writing

• The Importance of Covered Call Writing
• Covered Writing Philosophy
• The Total Return Concept of Covered Writing
• Computing Return on Investment
• Execution of the Covered Write Order
• Selecting a Covered Writing Position
• Writing Against Stock Already Owned
• Diversifying Return and Protection in a Covered Write
• Follow-Up Action
• Special Writing Situations
• Covered Call Writing Summary

Chapter 3 – Call Buying

• Why Buy?
• Risk and Reward for the Call Buyer
• Which Option to Buy?
• Advanced Selection Criteria
• Follow Up Action
• A Further Comment on Spreads

Chapter 4 – Other Call Buying Strategies

• The Protected Short Sale (or Synthetic Put)
• Follow Up Actions
• The Reverse Hedge (Simulated Straddle)
• Follow-Up Action
• Altering the Ratio of Long Calls to Short Stock
• Summary

Chapter 5 – Naked Call Writing

• The Uncovered (Naked) Call Option
• Investment Required
• The Philosophy of Selling Naked Options
• Risk and Reward
• Summary

Chapter 6 – Ratio Call Writing

• The Ratio Write
• Investment Required
• Selection Criteria
• The Variable Ratio Write
• Follow-Up Action
• An Introduction to Call Spread Strategies

Chapter 7 – Bull Spreads

• Degrees of Aggressiveness
• Ranking Bull Spreads
• Follow-Up Action
• Other Uses of Bull Spreads
• Summary

Chapter 8 – Bear Spreads Using Call Options

• The Bear Spread
• Selecting a Bear Spread
• Follow-Up Action
• Summary

Chapter 9 – Calendar Spreads

• The Neutral Calendar Spread
• Follow-Up Action
• The Bullish Calendar Spread
• Follow-Up Action
• Using All Three Expiration Series
• Summary

Chapter 10 – The Butterfly Spread

• Selecting the Spread
• Follow-Up Action
• Summary

Chapter 11 – Ratio Call Spreads

• Differing Philosophies
• Follow-Up Action
• Summary

Chapter 12 – Combining Calendar and Ratio Spreads

• Ratio Calendar Spread
• Choosing the Spread
• Follow-Up Action
• Delta-Neutral Calendar Spreads
• Follow-Up Action

Chapter 13 – Reverse Spreads

• Reverse Calendar Spreads
• Reverse Ratio Spread (Backspread)

Chapter 14 – Diagonalizing a Spread

• The Diagonal Bull Spread
• Owning a Call for “Free”
• Diagonal Backspreads
• Call Option Summary

Chapter 15 – Put Option Basics

• Put Strategies
• Pricing Put Options
• The Effect of Dividends on Put Option Premiums
• Exercise and Assignment
• Conversion

Chapter 16 – Put Option Buying

• Put Buying versus Short Sale
• Selecting Which Put to Buy
• Ranking Prospective Put Purchases
• Follow-Up Action
• Loss-Limiting Action
• Equivalent Positions

Chapter 17 – Put Buying in Conjunction with Common Stock Ownership

• Which Put to Buy
• Tax Considerations
• Put Buyins As Protection for the Covered Call Writer
• No-Cost Collars

Chapter 18 – Buying Puts in Conjunction with Call Purchases

• Straddle Buying
• Selecting a Straddle Buy
• Follow-Up Action
• Buying a Strangle

Chapter 19 – The Sale of a Put

• The Uncovered Put Sale
• Follow-Up Action
• Evaluating a Naked Put Write
• Buying Stock below Its Market Price
• The Covered Put Sale
• Ratio Put Writing

Chapter 20 – The Sale of a Straddle

• The Covered Straddle Write
• The Uncovered Straddle Write
• Selecting a Straddle Write
• Follow-Up Action
• Equivalent Stock Position Follow-Up
• Starting Out with the Protection in Place
• Strangle (Combination) Writing
• Further Comments on Uncovered Straddle and Strangle Writing

Chapter 21 – Synthetic Stock Positions Created by Puts and Calls

• Synthetic Long Stock
• Synthetic Short Sale
• Splitting the Strikes
• Summary

Chapter 22 – Basic Put Spreads

• Bear Spread
• Bull Spread
• Calendar Spread

Chapter 23 – Spreads Combining Calls & Puts

• The Butterfly Spread
• Combining an Option Purchase and a Spread
• A Simple Follow-Up Action for Bull or Bear Spreads
• Three Useful but Complex Strategies
• Selecting the Spreads
• Summary

Chapter 24 – Ratio Spreads Using Puts

• The Ratio Put Spread
• Using Deltas
• The Ratio Put Calendar Spread
• A Logical Extension (The Ratio Calendar Combination)
• Put Option Summary

Chapter 25 – LEAPS

• The Basics
• Pricing LEAPS
• Comparing LEAPS and Short-Term Options
• LEAPS Strategies
• Speculative Option Buying with LEAPS
• Selling LEAPS
• Spreads Using LEAPS
• Summary

Chapter 26 – Buying Options and Treasury Bills

• How the Treasury Bill/Option Strategy Operates
• Summary

Chapter 27 – Arbitrage

• Basic Put and Call Arbitrage (“Discounting”)
• Dividend Arbitrage
• Conversions and Reversals
• More on Carrying Costs
• Back to Conversions and Reversals
• Risks in Conversions and Reversals
• Summary of Conversion Arbitrage
• The “Interest Play”
• The Box Spread
• Variations on Equivalence Arbitrage
• The Effects of Arbitrage
• Risk Arbitrage Using Options
• Pairs Trading
• Facilitation (Block Positioning)

Chapter 28 – Mathematical Applications

• The Black-Scholes Model
• Expected Return
• Applying the Calculations to Strategy Decisions
• Facilitation or Institutional Block Positions
• Aiding in Follow-Up Action
• Implementation
• Summary

Chapter 29 – Introduction to Index Option Products and Futures

• Indices
• Cash-Based Options
• Futures
• Options on Index Futures
• Standard Options Strategies Using Index Options
• Put-Call Ratio
• Summary

Chapter 30 – Stock Index Hedging Strategies

• Market Baskets
• Program Trading
• Index Arbitrage
• Follow-Up Strategies
• Market Basket Risk
• Impact on the Stock Market
• Simulating an Index
• Trading the Tracking Error
• Summary

Chapter 31 – Index Spreading

• Inter-Index Spreading
• Summary

Chapter 32 – Structured Products

• Part I: “Riskless” Ownership of A Stock or Index
• The “Structure” of a Structured Product
• Cash Value
• The Cost of the Imbedded Call Option
• Price Behavior Prior to Maturity
• SIS
• Computing the Value of the Imbedded Call When the Underlying Is Trading at a Discount
• The Adjustment Factor
• Other Constructs
• Option Strategies Involving Structured Products
• Lists of Structured Products
• Part II: Pructs Designed to Provide “Income”
• PERCS
• Call Feature
• A PERCS Is a Covered Call Write
• Price Behavior
• PERCS Strategies
• PERCS Summary
• Other Structured Products
• Structure Product Summary

Chapter 33 – Mathematical Considerations for Index Products

• Arbitrage
• Mathematical Applications

Chapter 34 – Futures and Futures Options

• Futures Contracts
• Options on Futures
• Futures Option Trading Strategies
• Commonplace Mispricing Strategies
• Summary

Chapter 35 – Futures Option Strategies for Futures Spreads

• Futures Spreads
• Using Futures Options in Futures Spreads
• Summary

Chapter 36 – The Basics of Volatility Trading

• Definitions of Volatility
• Another Approach: GARCH
• Moving Averages
• Implied Volatility
• The Volatility of Volatility
• Volatility Trading
• Why Does Volatility Reach Extremes?
• Summary

Chapter 37 – How Volatility Affect Popular Strategies

• Vega
• Implied Volatility and Delta
• Effects on Neutrality
• Position Vega
• Outright Option Purchases and Sales
• Time Value Premium is a Misnomer
• Volatility and the Put Option
• Straddle or Strangle Buying and Selling
• Call Bull Spreads
• Vertical Put Spreads
• Put Bear Spreads
• Calendar Spreads
• Ratio Spreads and Backspreads
• Summary

Chapter 38 – Distribution of Stock Prices

• Misconceptions about Volatility
• Volatility Buyer’s Rule!
• The Distribution of Stock Prices
• What This Means for Option Traders
• Stock Price Distribution Summary
• The Pricing of Options
• The Probability of Stock Price Movement
• Expected Return
• Summary

Chapter 39 – Volatility Trading Techniques

• Two Ways Volatility Predictions Can Be Wrong
• Trading the Volatility Prediction
• Trading the Volatility Skew
• Volatility Trading Summary

Chapter 40 – Advanced Concepts

• Neutrality
• The “Greeks”
• Strategy Considerations: Using the “Greeks”
• Advanced Mathematical Concepts
• Summary

Chapter 41 – Taxes

• History
• Basic Tax Treatment
• Exercise and Assignment
• Special Tax Problems
• Summary
• Tax Planning Strategies for Equity Options
• Summary

Chapter 42 – The Best Strategy?

• General Concepts: Market Attitude and Equivalent Positions
• What Is Best for Me Might Not Be Best For you
• Mathematical Ranking
• Summary
• Postscript

• Appendix A – Strategy Summary
• Appendix B – Equivalent Positions
• Appendix C – Formulae
• Appendix D – Graphs
• Appendix E – Qualified Covered Calls
• Glossary
• Index