Options Trading for the Conservative Investor

About the Author

Michael C. Thomsett is a prolific author, having written over 60 books on investment and financial topics. His works include the best-selling Getting Started in Options, which is now in its sixth edition and has sold over 200,000 copies. His Investment and Securities Dictionary was named Outstanding Academic Book by Choice Magazine. Thomsett is known for his ability to demystify complex financial concepts and make them accessible to a broad audience. He lives in Port Townsend, Washington.

Main Idea

The primary objective of Options Trading for the Conservative Investor by Michael C. Thomsett is to introduce conservative investors to options trading strategies that can enhance their portfolios without increasing risk. Thomsett argues that options, often perceived as risky, can be used conservatively to preserve capital, maximize predictability, and maintain strong returns. The book outlines various options strategies that are aligned with conservative investment principles, aiming to protect and enhance a portfolio through systematic risk management.

Table of Contents

1. The Ground Rules
2. The Workings of Option Contracts
3. Managing Profits and Losses
4. Options as Cash Generators
5. Alternatives to Stock Purchase
6. Combination Conservative Techniques

The Ground Rules

Thomsett begins by establishing the fundamental ground rules for conservative investors interested in options trading. He emphasizes the importance of selecting strong, long-term hold stocks that have been thoroughly analyzed. The goal is to use options to protect these investments rather than speculate.

"Limit options activities to stocks you have prequalified as strong, long-term hold stocks, to be a permanent part of your portfolio." - Michael C. Thomsett

The ground rules include:

• Preserve spending power: Ensure that investments retain value after accounting for inflation and taxes.
• Avoid unacceptable risks: Steer clear of excessive market, liquidity, and diversification risks.
• Protect profits: Utilize options to safeguard gains without having to sell the underlying securities.

Options Fundamentals

Thomsett explains that options are contracts granting specific rights to buyers and obligations to sellers. A put option gives the buyer the right to sell 100 shares at a specified price before expiration, while a call option allows the buyer to purchase 100 shares under similar terms. Understanding these basics is crucial for conservative investors to utilize options effectively.

The Workings of Option Contracts

Thomsett delves into the mechanics of option contracts, explaining key terms and concepts that determine an option's value. Each option contract corresponds to 100 shares of the underlying stock and has specific attributes that influence its pricing and strategic use.