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OptionsMade EasySecond Edition

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OptionsMade EasySecond EditionYour Guide to Profitable TradingGuy CohenAn imprint of Pearson EducationLondon New York Toronto Sydney Tokyo Singapore Hong KongCape Town New Delhi Madrid Paris Amsterdam Munich Milan Stockholm

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vFINANCIAL TIMES PRENTICE HALL BOOKSFor more information, please go to www.ft-ph.comBusiness and SocietyJohn Gantz and Jack B. RochesterPirates of the Digital Millennium: How the Intellectual Property Wars Damage OurPersonal Freedoms, Our Jobs, and the World EconomyDouglas K. SmithOn Value and Values: Thinking Differently About We in an Age of MeCurrent EventsAlan ElsnerGates of Injustice: The Crisis in America’s PrisonsJohn R. TalbottWhere America Went Wrong: And How to Regain Her Democratic IdealsEconomicsDavid DranoveWhat’s Your Life Worth? Health Care Rationing Who Lives? Who Dies?Who Decides?EntrepreneurshipDr. Candida Brush, Dr. Nancy M. Carter, Dr. Elizabeth Gatewood,Dr. Patricia G. Greene, and Dr. Myra M. HartClearing the Hurdles: Women Building High Growth BusinessesOren Fuerst and Uri GeigerFrom Concept to Wall Street: A Complete Guide to Entrepreneurshipand Venture CapitalDavid Gladstone and Laura GladstoneVenture Capital Handbook: An Entrepreneur’s Guide to Raising Venture Capital,Revised and UpdatedThomas K. McKnightWill It Fly? How to Know if Your New Business Idea Has Wings Before You Take the LeapStephen Spinelli, Jr., Robert M. Rosenberg, and Sue BirleyFranchising: Pathway to Wealth CreationExecutive SkillsCyndi Maxey and Jill BremerIt’s Your Move: Dealing Yourself the Best Cards in Life and WorkJohn PutzierWeirdos in the WorkplaceFinanceAswath DamodaranThe Dark Side of Valuation: Valuing Old Tech, New Tech, and NewEconomy CompaniesKenneth R. Ferris and Barbara S. Pécherot PetittValuation: Avoiding the Winner’s Curse

viInternational Business and GlobalizationJohn C. EdmundsBrave New Wealthy World: Winning the Struggle for World ProsperityRobert A. IsaakThe Globalization Gap: How the Rich Get Richer and the Poor Get LeftFurther BehindJohny K. JohanssonIn Your Face: How American Marketing Excess Fuels Anti-AmericanismPeter MarberMoney Changes Everything: How Global Prosperity Is Reshaping Our Needs, Values,and LifestylesFernando Robles, Françoise Simon, and Jerry HaarWinning Strategies for the New Latin MarketsInvestmentsZvi Bodie and Michael J. ClowesWorry-Free Investing: A Safe Approach to Achieving Your Lifetime GoalsGuy CohenThe Bible of Options Strategies: The Definitive Guide for Practical Trading StrategiesMichael CovelTrend Following: How Great Traders Make Millions in Up or Down MarketsAswath DamodaranInvestment Fables: Exposing the Myths of “Can’t Miss” Investment StrategiesHarry DomashFire Your Stock Analyst! Analyzing Stocks on Your OwnDavid Gladstone and Laura GladstoneVenture Capital Investing: The Complete Handbook for Investing in Businesses forOutstanding ProfitsD. Quinn MillsBuy, Lie, and Sell High: How Investors Lost Out on Enron and the Internet BubbleD. Quinn MillsWheel, Deal, and Steal: Deceptive Accounting, Deceitful CEOs, and IneffectiveReformsMichael J. PanznerThe New Laws of the Stock Market Jungle: An Insider’s Guide to Successful Investingin a Changing WorldH. David Sherman, S. David Young, and Harris CollingwoodProfits You Can Trust: Spotting & Surviving Accounting LandminesMichael ThomsettStock Profits: Getting to the Core—New Fundamentals for a New AgeLeadershipJim Despain and Jane Bodman ConverseAnd Dignity for All: Unlocking Greatness through Values-Based LeadershipMarshall Goldsmith, Cathy Greenberg, Alastair Robertson, and Maya Hu-ChanGlobal Leadership: The Next GenerationManagementRob Austin and Lee DevinArtful Making: What Managers Need to Know About How Artists Work

viiJ. Stewart Black and Hal B. GregersenLeading Strategic Change: Breaking Through the Brain BarrierDavid M. Carter and Darren RovellOn the Ball: What You Can Learn About Business from Sports LeadersCharles J. Fombrun and Cees B.M. Van RielFame and Fortune: How Successful Companies Build Winning ReputationsAmir HartmanRuthless Execution: What Business Leaders Do When Their Companies Hit the WallHarvey A. HornsteinThe Haves and the Have Nots: The Abuse of Power and Privilege in the Workplace and How to Control ItKevin Kennedy and Mary MooreGoing the Distance: Why Some Companies Dominate and Others FailSteven R. KurshMinding the Corporate Checkbook: A Manager’s Guide to Executing SuccessfulBusiness InvestmentsRoy H. LubitCoping with Toxic Managers, Subordinates and Other Difficult PeopleFergus O’ConnellThe Competitive Advantage of Common Sense: Using the Power You Already HaveTom OsentonThe Death of Demand: The Search for Growth in a Saturated Global EconomyW. Alan Randolph and Barry Z. PosnerCheckered Flag Projects: 10 Rules for Creating and Managing Projects that Win,Second EditionStephen P. RobbinsDecide & Conquer: Make Winning Decisions to Take Control of Your LifeStephen P. RobbinsThe Truth About Managing People And Nothing but the TruthRonald Snee and Roger HoerlLeading Six Sigma: A Step-by-Step Guide Based on Experience with GE and OtherSix Sigma CompaniesSusan E. Squires, Cynthia J. Smith, Lorna McDougall, and William R. YeackInside Arthur Andersen: Shifting Values, Unexpected ConsequencesJerry WeissmanPresenting to Win: The Art of Telling Your StoryMarketingDavid ArnoldThe Mirage of Global Markets: How Globalizing Companies Can Succeed asMarkets LocalizeMichael BaschCustomerCulture: How FedEx and Other Great Companies Put the Customer FirstEvery DayJonathan Cagan and Craig M. VogelCreating Breakthrough Products: Innovation from Product Planningto Program ApprovalLewis P. CarboneClued In: How To Keep Customers Coming Back Again And Again

viiiTom OsentonCustomer Share Marketing: How the World’s Great Marketers Unlock Profitsfrom Customer LoyaltyBernd H. Schmitt, David L. Rogers, and Karen VrotsosThere’s No Business That’s Not Show Business: Marketing in Today’s ExperienceCultureYoram J. Wind and Vijay Mahajan, with Robert GuntherConvergence Marketing: Strategies for Reaching the New Hybrid ConsumerPersonal FinanceDavid ShapiroRetirement Countdown: Take Action Now to Get the Life You WantSteve WeismanA Guide to Elder Planning: Everything You Need to Know to Protect Yourself Legallyand FinanciallyStrategyEdward W. Davis and Robert E. SpekmamThe Extended Enterprise: Gaining Competitive Advantage through CollaborativeSupply ChainsJoel M. Shulman, With Thomas T. StallkampGetting Bigger by Growing Smaller: A New Growth Model for Corporate America

To Geoff, whose genius and contrarian outlook gave methe stomach to perform one of his reasonable miracles.

xiContentsAcknowledgments xiiiAbout the Author xvExecutive summary xviiPreface xix1Introduction to Options 12Into the Marketplace 293The Basics of Fundamental Analysis 494The Basics of Technical Analysis 855Two Popular Strategies and How to Improve Them 1376An Introduction to the Greeks 1647Bull Call Spreads and Bull Put Spreads 1978Two Basic Volatility Strategies 2209Two Basic Sideways Strategies 23810Trading and Investing Psychology 26211Putting It All Together—A Call to Action 28012Stock Futures and Options Strategies (Bonus Chapter) 289Appendix I Strategy Table 293Appendix II Glossary 305References and Recommended Reading 319Index 321

xiiiAcknowledgmentsIt’s amazing how many parts of your mind go into writing a book like this. As aresult, there are a number of people I must thank for both their direct andindirect influence.First to my friend Geoffrey Glassborow to whom this book is dedicated andwhose wondrous skills enabled me to prove modern medicine wrong. In 1994 Iwas diagnosed with ulcerative colitis, an intensely debilitating condition of thelower intestine. The condition was serious enough to lead doctors in both theUK and USA to recommend surgery as the only means of “relief.” At this time Iwas in constant pain and fear, such that even venturing out of my home becamean achievement in itself. Through Geoff, I not only made a full recovery, but Ialso learned how to think, something we don’t really get taught at school. It maysound a bit trite but because of what was achieved, I can now look on everyobstacle in life as a challenge and every challenge as an opportunity.I also need to thank my MBA Finance options lecturer from City University(Cass) Business School, Professor Gordon Gemmill. It was his enthusiasm thatgot me hooked in the first place.Alpesh B. Patel, the renowned financial journalist and author, has beenanother source of inspiration. From our first meeting where I demonstratedOptionEasy, he has encouraged me and introduced me to other importantpeople in this industry. It’s a rarity to find his sort in any industry once theybecome well established.Finally, to my friends, particularly those who stuck around during thedarkest days when it was almost impossible for me to even go out. I will alwaysremember who you are particularly Dominic and Lulu who went way beyondthe call of duty.The publisher is grateful for permission to use charts created on Worden Brothers TC2005 and TradeStation , the flagship product ofTradeStation Technologies Inc. http://www.tradestation.com.