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Options Trading for the Institutional Investor: Managing Risk in Financial Institutions

Book Description

To protect portfolios in today's volatile and uncertain market environment, institutional investors need to hedge losses, create extra sources of income, and reduce risk. In his extensively updated and expanded Options Trading for the Institutional Investor, Third Edition, renowned options expert Michael C. Thomsett shows how to do all this effectively.

One step at a time, Thomsett helps institutional investors exploit powerful, carefully chosen options strategies that can dramatically increase overall returns as you manage risks within your institution's limits. Thomsett discusses covered call writing on carefully selected stocks, contingent purchase strategies, and powerful "combination" strategies that produce cash to bolster current income. He guides professional investors through every strategy, using actual examples, portfolios, and graphs taken directly from today's markets. Wherever applicable, he addresses specific forms of risk and volatility that only institutional investors face.

This thoroughly updated Third Edition includes a chart-based analytical method that relies on reversal signals in the underlying as an alternative to volatility analysis. Thomsett presents new chapters on two powerful strategies he has developed and utilized to optimize returns while minimizing risk: the 1-2-3 Iron Butterfly, and the Dividend Collar. This edition also adds detailed new coverage of risk evaluation.

Table of Contents

  1. About This eBook
  2. Title Page
  3. Copyright Page
  4. Contents
  5. Acknowledgments
  6. About the Author
  7. Preface
    1. The Elusive Goal: Low Risk and High Yield
    2. Endnotes
  8. 1. Setting the Ground Rules
    1. The Ground Rules
    2. A Model Portfolio
  9. 2. Option Basics
    1. The Workings of the Options Contract
    2. Calls and Call Strategies
    3. Puts and Put Strategies
    4. Listed Options and LEAPS Options
    5. Coordinating Strategies with Portfolio Goals
    6. Option and Stock Volatility: The Central Element of Risk
    7. Trading Costs in the Option Analysis
    8. Tax Rules for Options: An Overview
    9. The Importance of Professional Advice and Tax Planning
    10. Endnotes
  10. 3. Options in Context
    1. The Nature of Risk and Reward
    2. Perceptions about Options
    3. Short Positions: Naked or Covered
    4. Margin Requirements and Trading Restrictions
    5. Return Calculations: Seeking Valid Comparisons
    6. Long-Term Goals as a Guiding Force
    7. Exercise as a Desirable Outcome
  11. 4. Chart-Based Analysis
    1. Criteria for Chart-Based Analysis
    2. A Study of Charts for the Model Portfolio
    3. Endnote
  12. 5. Managing Profits and Losses
    1. Your Conservative Dilemma
    2. Managing Profits with Options
    3. Overcoming the Profit-Taking Problem
    4. Managing the Inertia Problem
    5. Taxes and Profits
  13. 6. Options as Cash Generators
    1. The Covered Call Concept
    2. Examples: Ten Stocks and Covered Calls
    3. Working within Preestablished Standards
    4. Smart Conservative Ground Rules
    5. A Conservative Approach
    6. Tax Ramifications of Covered Calls
    7. Rolling Forward and Up: Exercise Avoidance
    8. The Exercise Acceptance Strategy
    9. Endnote
  14. 7. The 1-2-3 Iron Butterfly
    1. The Iron Butterfly
    2. The 1-2-3 Iron Butterfly Concept
    3. The Hedge Matrix and Collateral Requirements
    4. Examples of the Strategy
  15. 8. The Dividend Collar
    1. Managing Portfolio Profits with the Dividend Collar
  16. 9. Alternatives to Stock Purchase
    1. Leverage and Options
    2. The Long-Call Contingent Purchase Strategy
    3. The Covered Long Call
    4. Short Puts and Contingent Purchase
    5. Rescue Strategy Using Calls
    6. Rescue Strategy Using Puts
    7. Covered Calls for Contingent Sale
  17. 10. Option Strategies in Down Markets
    1. Thinking Outside the Market Box
    2. The Long Put: The Overlooked Option
    3. Short Puts: A Variety of Strategies
    4. Using Calls in Down Markets
    5. Evaluating Your Stock Positions
    6. Stock Positions and Risk Evaluation
    7. Options and Downside Risk
    8. Option Planning with Loss Carryover
    9. Endnote
  18. 11. Combination Conservative Techniques
    1. Spread Techniques
    2. Straddle Techniques
    3. Long or Short Positions
    4. Theory versus Practice
    5. Tax Problems with Combination Strategies
    6. The Ultimate High-Return Strategy
    7. Examples of the Strategy in Practice
    8. Outcome Scenarios
    9. The Augmented Strategy: A Short Straddle
    10. Rescue Strategies
  19. 12. Risk Evaluation Techniques
    1. The Nature of Greed Risk
    2. A Range of Options-Related Risks
    3. Estimating Your Risk Tolerance
  20. 13. Stock Selection and the Option Contract
    1. Remembering Your Conservative Profile as a Priority
    2. Dangers and Pitfalls in Using Options
    3. Temptation to Select Most Volatile Stocks
    4. Creating Sensible Conservative Standards
    5. Maintaining Fundamental Clarity
    6. The Importance of Taxes in the Option Equation
    7. Option Volatility to Judge Stocks
  21. Glossary
  22. Appendix. Option Trading Strategies
  23. Index