9.- Introduction to Options.pdf

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Sec9.pdf
5-Step Investing Formula
Online Course Manual
9
Introduction to Options
Section 9 of 11
www.investools.com
© 2005 INVESTools Inc. All rights reserved.
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THE 5-STEP INVESTING FORMULA
Introduction to Options
Section Contents
SECTION 9 Introduction to Options
Advantages/Risks of Options ...............................................................5
Leverage ...............................................................................................9
Call Options ..........................................................................................9
Put Options .........................................................................................11
Covered Calls ......................................................................................12
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THE 5-STEP INVESTING FORMULA
Introduction to Options
Course Overview
INTRODUCTION
SECTION 1 Getting Started
Logging into the INVESTools Investor Toolbox
Support Links
Workshop Review
Account Information
Subscription Renewal
Technical Support
Contact an Instructor
SECTION 6 Step 4: Technical Analysis
Technical Indicators
Moving Averages
MACD
Stochastics
Volume
Support & Resistance
Buy Signals
Money Management
Sell Stop Orders
How Many Shares to Buy
Sell Signals
Insider Trading
SECTION 2 Introduction to Investing
Tolerance for Risk
Setting Goals
Asset Allocation
Tax Exposure
Brokerage Firms
Introduction to the 5-Step Investing Formula
SECTION 7 Step 5: Portfolio Management
Creating a Portfolio
Managing Your Portfolio
Paper Trading Account
THE 5-STEP INVESTING FORMULA
SECTION 3 Step 1: Searching for Stocks
Using a Prebuilt Search
Navigating the List of Stocks
BONUS SECTION
SECTION 8 Bonus Topics
TurboSearch
Index Tracking Stocks / Exchange-Traded Funds
Dow Jones Industrial Average—
The Diamonds (DIA)
S&P 500—The Spider (SPY)
NASDAQ—The Qs (QQQQ)
SECTION 4 Step 2: Industry Group Analysis
Top-Down Analysis
Big Chart
AutoAnalyzing All Stocks in a Group
Best & Worst Industries List
SECTION 5 Step 3: Fundamental Analysis
Phase 1
Phase 2
Price Pattern
Volatility
Zacks Report
Market Guide
News
AutoAnalyzer™
SECTION 9 Introduction to Options
Advantages/Risks of Options
Leverage
Call Options
Put Options
Covered Calls
SECTION 10 Appendix
Phase 2 Stock Scoring Form
Phase 2 Quick List for Zacks Report and
Market Guide
Investment Tracking Record
SECTION 11 Glossary
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THE 5-STEP INVESTING FORMULA
Introduction to Options
Introduction to Options
Your education as an investor is a lifelong process. The 5-Step Investing
Formula provides you with a solid foundation to build on; but from here, it’s up
to you to determine which direction to go. There are various investing methods
and strategies to learn about and apply as you develop additional skills.
Once investors understand investing basics, the next most natural step for them
is options. Options are a popular investment vehicle that can be used to earn
a profit in both bullish and bearish markets. Options are also used to generate
income from your current stock holdings and insure your portfolio against
unexpected declines.
This introduction is intended to help you understand options as an investment
strategy and how you can use them to generate income. As with any
investment, options have risks and advantages.
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THE 5-STEP INVESTING FORMULA
Introduction to Options
Advantages/Risks of Options
Advantages
One of the biggest advantages of options is that there are many ways to profit.
When you buy stock, there are basically three possible outcomes:
1. It can go up
2. It can stay the same (sideways)
3. It can go down
Two of these three outcomes are bad with stocks. However, options offer an
investor the ability to invest in stocks using strategies that allow for profit in
all three outcomes.
Caution: While using an option strategy may enable an investor to profit when
a stock goes the opposite direction than was forecasted, it may only provide
a small amount of protection. A substantial move in the opposite direction of
what was forecasted could still result in a loss, even if you’re using one of the
conservative option strategies discussed. It is important to understand your
return/loss potential in a variety of scenarios based on price movements of the
underlying stock.
In addition to the many ways to profit, options offer other advantages:
• Freely traded—Options are traded on an exchange, like stocks. In fact,
options are traded using nearly the same mechanics as stocks: you buy
at the ask price and sell at the bid price. You can also use market or
limit orders like you do with stocks.
• Leverage—This is one of the big appeals of options: you can buy
options for a small amount, yet they can produce substantial profits
in a very short period of time. Leverage is a double-edged sword: it’s
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