PrintNumber	ErrorLocation	Error	Correction	DateAdded
9	ppvii-xi	Table of Contents: Leader dots added	fixed	5/15/2008
9	p55	Risk Profile image off	fixed	5/15/2008
9	p305	Covered Put : Component Parts wrong, first image needs flipped	fixed	5/21/2008
9	p313	Diagonal Put : Risk Profile wrong, image needs flipped	fixed	5/21/2008
9	p313	Diagonal Put : Risk Profile wrong, image needs flipped	fixed	5/21/2008
9	p362-364	FT statement moved and ads deleted	fixed	5/21/2008
9	piv	print line updated	fixed	5/28/2008
9	pp69-75	Section 2.11 Calendar Put Updated	fixed	5/28/2008
9	p ix	2.13 Covered Put (Also Known as a Married Put) 82	2.13 Covered Put (Also Known as a Married Put) 84	6/5/2008
9	p xiv	Covered Put 2 82	Covered Put 2 84	6/5/2008
9	p xvii	Covered Put 2 82	Covered Put 2 84	6/5/2008
9	p xxi	Covered Put 2 82	Covered Put 2 84	6/5/2008
9	p xxii	Covered Put 2 82	Covered Put 2 84	6/5/2008
9	p xxiv	Covered Put 2 82	Covered Put 2 84	6/5/2008
9	p 331 - 356	Index entries fixed to match replaced sections in chapter 2	fixed	6/5/2008
9	p 69	Buy stock at 25.00 Sell stock at 27.50 Net profit at 2.50 Total 5 2.50 2 6.05 5 loss of 3.55 Lesson: Never exercise a long-term option because you’ll miss out on Time Value! Before we wrap up this chapter, we’re going to introduce two additional strategies. They’re variations of the Calendar Call and Diagonal Call. They’re simply the equivalent strategies using puts; hence they’re called a Calendar Put and Diagonal Put. We put them at the end of this section in order to be thorough. 2.11 Calendar Put Proficiency Direction Volatility Asset Legs Max Risk Max Reward Strategy Type N/A 1 Advanced Bullish n Long Put Capped Capped Income n Short Put 2.11.1 Description Calendar spreads are known as horizontal spreads, and the Calendar Put is a variation of a Calendar Call where you substitute the calls with puts. Ultimately the strategy	Buy stock at 25.00 Sell stock at 27.50 Net profit at 2.50 Total 5 2.50 2 6.05 5 loss of 3.55 Lesson: Never exercise a long-term option because you’ll miss out on Time Value! Before we wrap up this chapter, we’re going to introduce two additional strategies. They’re variations of the Calendar Call and Diagonal Call. They’re simply the equivalent strategies using puts; hence they’re called a Calendar Put and Diagonal Put. We put them at the end of this section in order to be thorough. 2.11 Calendar Put Proficiency Direction Volatility Asset Legs Max Risk Max Reward Strategy Type N/A 1 Advanced Bearish n Short Put Capped Capped Income n Long Put 2.11.1 Description The Calendar Put is the put version of the Calendar Call. Instead of buying longer term calls you buy longer term puts. Instead of selling calls with less time to expiration, you sell puts with less time to expiration. Ultimately the strategy is virtually identical but in the exact reverse. You make an income out of a stock that is falling or rangebound.	6/5/2008
9	p 70	is virtually identical. The question lies in whether you can achieve a better yield using the puts versus the calls. Like the Calendar Call, the problem with a Calendar Put is in the very essence of the shape of the risk profile (see the following). What we’d like to do is create something similar to a Covered Call, but with a better yield and without the expense. The Calendar Put certainly requires less investment; however, the shape is different. If the stock rises too far too soon, then the Calendar Put can become loss-making. So even though you got the direction of the trade right, you could still lose money! Both options share the same strike, so if the stock rises above the strike, your short put will expire worthless, whereas your long put will be less valuable because it’s now further OTM. If the stock falls, the short put will be exercised, and you’ll then have to sell the long put (hopefully for a profit), use the proceeds to sell the stock at the market price, and then buy it back at the strike price. Therefore, the best thing that can happen is that the stock is at the strike price at the first expiration. This will enable you to write another put for the following month if you like. Buy put Sell put Calendar Put Steps to Trading a Calendar Put 1. Buy a long-term expiration put with a near the money strike price. 2. Sell a short-term put (say monthly) with the same strike price. Steps In - Try to ensure that the trend is upward or rangebound and identify clear areas of support and resistance. Steps Out - Manage your position according to the rules defined in your Trading Plan. - If the stock closes below the strike at expiration, you will be exercised. You will sell your long put, buy the stock at the strike price, and sell it at the market price, having profited from both the short option premium you received and the uplift in the long option premium. Exercise of the short option is automatic. Do not exercise the long option or you will forfeit its time value. - but above your lower stop loss, let the short put expire worthless and keep the entire premium. You can then write another put for the following month. - If the stock rises above your higher stop loss, then either sell the long option (if you’re approved for Naked Put writing) or reverse the entire position.	Like the Calendar Call, the problem with a Calendar Put is in the very essence of the shape of the risk profile (see below). What we’d like to do is create something similar to a Covered Put, but with a better yield and without the hassle of margin. The Calendar Put certainly achieves both, however, the shape is different. If the stock falls too far too soon, then the Calendar Put can become loss making. So even though you got the direction of the trade right, you could still lose money! Both options share the same strike, so if the stock rises above the strike, your short put will expire worthless while your long put will be less valuable because it’s now OTM. If the stock falls, the short put will be exercised, you’ll then have to sell the long put (typically for a profit), use the proceeds to sell the stock at the market price, and then buy it back at the strike price. Therefore, the best thing that can happen is that the stock is at the strike price at the expiration of the short put. This will enable you to write another put for the following month if you like. Sell put Buy put Calendar Put Steps to Trading a Calendar Put 1. Buy a long-term expiration put with a Near-the-Money strike price 2. Sell a short term put (say monthly) with the same strike price. Steps In - Try to ensure that the trend is downward or rangebound and identify clear areas of support and resistance. Steps Out - Manage your position according to the rules defined in your Trading Plan. - If the stock closes below the shared strike at expiration, your short put will be exercised. You will sell your long put, buy the stock at the shared strike price, deliver it at the lower market price, while having profited from both the option premium you received and the uplift in the long put option premium. Exercise of the short option is automatic. Do not exercise the long option or you will forfeit its time value. If you’re going to be exercised then it’s best to simply reverse the entire position and close the trade the day before expiration. - If the stock remains above the shared strike but below your stop loss, let the short put expire worthless and keep the entire premium. If you like you can then write another put for the following month if you’re still neutral to bearish on the stock. - If the stock rises above your stop loss, then either sell the long option (if you’re approved for naked put writing), or reverse the entire position.	6/5/2008
9	p 71	2.11.2 Context Outlook - With a Calendar Put, your outlook is neutral to bullish. You expect a steady rise. Rationale - To generate income against your longer term long position by selling puts and receiving the premium. Net Position - This is a net debit transaction because your bought puts will be more expensive than your sold puts, which have less time value. - Your maximum risk on the trade itself is limited to the net debit of the bought puts less the sold puts. Your maximum reward is limited to the residual put value when the stock is at the strike price at the first expiration, less the net debit. Effect of Time Decay - Time decay affects your Calendar Put trade in a mixed fashion. It erodes the value of the long put but helps you with your income strategy by eroding the value faster on the short put. Appropriate Time Period to Trade - You will be safest to choose a long time to expiration with the long put and a short time (one month) for the short put. Selecting the Stock - Choose from stocks with adequate liquidity, preferably over 500,000 Average Daily Volume (ADV). - Try to ensure that the trend is upward or rangebound and identify clear areas of support and resistance. Selecting the Option - Choose options with adequate liquidity; open interest should be at least 100, preferably 500. - Strike—Look for either the ATM or just ITM (higher) strike above the current stock. If you’re bullish, then choose a higher strike; if neutral, choose the ATM strike. - Expiration—Look at either of the next two expirations for the short option and compare monthly yields. Look for over six months for the long option.	2.11.2 Context Outlook - With a Calendar Put, your outlook is neutral to bearish.  Rationale - To generate income against your longer term long put position by selling puts and receiving the premium. Net Position - This is a net debit transaction because your longer term bought puts will be more expensive than your shorter term sold puts which have less time value. - Your maximum risk on the trade itself is limited to the net debit of the bought puts less the sold puts. Your maximum reward occurs when the stock price is at the strike price at the expiration of the sold put. Effect of Time Decay - Time decay affects your Calendar Put trade in a mixed fashion. It erodes the value of the long put but can help you with your income strategy by eroding the value faster on the short put. Appropriate Time Period to Trade - You will be safest to choose a long time to expiration with the long put and a shorter time (say 1 month) for the short put. Selecting the Stock - Choose from stocks with adequate liquidity, preferably over 500,000 Average Daily Volume (ADV). - Try to ensure that the trend is downward or rangebound and identify clear areas of support and resistance. Selecting the Option - Choose options with adequate liquidity, open interest should be at least 100, preferably 500. - Strike—Look for either the ATM or just ITM (higher) strike above the current stock price. If you’re bearish, then choose a lower strike, if neutral choose the ATM strike in anticipation of writing more puts in the future. - Expirations—Look at either of the next two expirations for the short option and compare monthly yields. Look for over six months for the long option.	6/5/2008
9	p 72	2.11.3 Risk Profile - Maximum Risk [Put strike] – [maximum value of long put at the first expiration] 1 [net debit] - Maximum Reward [Long put value at strike price at first expiration] 2 [net debit] - Breakeven Down Depends on the value of the long put option at the time of the short put expiration - Breakeven Up Depends on the value of the long put option at the time of the short put expiration 2.11.4 Greeks 2.11.5 Advantages and Disadvantages Advantages - Generate monthly income. - Can profit from rangebound stocks and make a higher yield than with a Covered Call or Naked Put.	2.11.3 Risk Profile - Maximum Risk Typically the net debit paid - Maximum Reward [long put value at strike price at first expiration] – [net debit] - Breakeven Down Depends on the value of the long put option at the time of the short put expiration - Breakeven Up Depends on the value of the long put option at the time of the short put expiration 2.11.4 Greeks 2.11.5 Advantages and Disadvantages Advantages - Generate (monthly) income. - Can profit from rangebound stocks and make a higher yield than with a Covered Put or Naked Call.	6/6/2008
9	p 73	Disadvantages - Capped upside if the stock rises. - Uncapped downside—you can lose more than your net debit with this strategy. - Can lose on the upside if the stock rises significantly. - High yield does not necessarily mean a profitable or high probability profitable trade. 2.11.6 Exiting the Trade Exiting the Position - With this strategy, you can simply unravel the spread by buying back the puts you sold and selling the puts you bought in the first place. - Advanced traders may leg up and down as the underlying asset fluctuates up and down. In this way, you can take incremental profits before the expiration of the trade. Mitigating a Loss - Unravel the trade as described previously. - Advanced traders may choose to only partially unravel the spread leg-by-leg. In this way, they will leave one leg of the spread exposed in order to attempt to profit from it. 2.11.7 Example ABCD is trading at $65.00 on May 5, 2004, with Historical Volatility at 33%. - Buy January 2006 65 puts at $9.00 - Sell June 2004 65 puts at $3.00 At June Expiration 1. Scenario: stock falls to $60.00 Long puts worth approximately 10.76; profit so far 5 1.76 Short puts expire $5.00 ITM Procedure: sell bought puts; sell stock at current price and buy at strike price Exercised at $65.00 Sell stock at 60.00 Buy stock at 65.00 Loss 5 5.00	Disadvantages - Capped profits if the stock falls. - Can lose if the stock falls significantly and you haven’t either bought deep enough ITM, or sold far enough OTM away. - High yield does not necessarily mean a profitable or high probability profitable trade. 2.11.6 Exiting the Trade Exiting the Position - With this strategy you can simply unravel the spread by buying back the puts you sold and selling the puts you bought in the first place. - Advanced traders may leg up and down as the underlying asset fluctuates up and down. In this way you can take incremental profits before the expiration of the trade. Mitigating a Loss - Unravel the trade as above. - Advanced traders may choose to only partially unravel the spread leg by leg. In this way they will leave one leg of the spread exposed in order to attempt to profit from it. 2.11.7 Example ABCD is trading at $81.60 on January 2, 2008, with Historical Volatility at 40%. - Sell March 2008 $80.00 puts @ $5.00 - Buy June 2008 $80.00 puts @ $7.30 At the March Expiration Net Debit Higher strike put premium – lower strike put premium $7.30 – $5.00 $2.30 Maximum Risk Higher strike put premium – lower strike put premium $7.30 – $5.00 $2.30 Maximum Reward [long put value at the time of the short put expiration, when the stock price is at the strike price] less [net debit] Assuming implied volatility remains at 40%, here the maximum reward = $3.70	6/6/2008
9	p 74	Sell long put for a profit 5 1.76 Keep short put premium 5 3.00 Loss on Exercise 5 5.00 Total position 5 0.24 loss If you tried to exercise the bought put: Procedure: exercise bought puts at $65.00; buy stock at $65.00 for exercised sold put Buy put at 9.00 Sell put at 3.00 Net cost 5 6.00 Sell stock at 65.00 Buy stock at 65.00 Net profit at 0.00 Total 5 6.00 2 0.00 5 loss of 6.00 Lesson: Think twice about exercising a long-term option because you’ll miss out on Time Value! 2. Scenario: stock falls to $62.50 Long puts worth approximately 9.71; profit so far 5 0.71 Short puts expire $2.50 ITM Procedure: sell bought puts; sell stock at current price and buy at strike price Exercised at $65.00 Sell stock at 62.50 Buy stock at 65.00 Loss 5 2.50 Sell long put for a profit 5 0.71 Keep short put premium 5 3.00 Loss on Exercise 5 2.50 Total position 5 1.21 profit If you tried to exercise the bought put: Procedure: exercise bought puts at $65.00; buy stock at $65.00 for exercised sold put Buy put at 9.00 Sell put at 3.00 Net cost 5 6.00 Sell stock at 65.00 Buy stock at 65.00 Net profit at 0.00 Total 5 6.00 2 0.00 5 loss of 6.00	Breakevens Depends on the value of the long put option at the time of the short put expiration. Assuming implied volatility remains at 40%, here the breakevens are 71.80 and 91.90 respectively. Note there are two breakevens with calendar spread trades. This means you can be right in terms of direction, yet still lose money if the stock falls too far too quickly. Let’s look at a few scenarios of this strategy: At the March Expiration 1. Scenario: stock rises to $150.00 Assuming no change in implied volatility, the long puts are now worth approximately zero; loss so far = 7.30 Short puts expire worthless: profit = 5.00 No exercise Total position = (7.30) + 5.00 = loss so far of 2.30 2. Scenario: stock rises to $95.00 Assuming no change in implied volatility, the long puts are now worth approximately 1.75; loss so far = 5.55 Short puts expire worthless: profit = 5.00	6/6/2008
9	p 75	Lesson: Think twice about exercising a long-term option because you’ll miss out on Time Value! 3. Scenario: stock stays at $65.00 Long puts worth approximately 8.75; loss so far 5 0.25 Short puts expire worthless; profit 3.00 No exercise Total position 5 9.00 1 3.00 2 0.25 5 11.75 5 profit of 2.75 4. Scenario: stock rises to $70.00 Long puts worth approximately 7.08; loss so far 5 1.92 Short puts expire worthless; profit 3.00. No exercise Total position 5 9.00 1 3.00 2 1.92 5 10.08 5 profit of 1.08 5. Scenario: stock rises to $75.00 Long puts worth approximately 5.70; loss so far 5 3.30 Short puts expire worthless; profit 3.00. No exercise Total position 5 9.00 1 3.00 2 3.30 5 8.70 5 loss of 0.30	No exercise Total position = (5.55) + 5.00 = loss so far of 0.55 3. Scenario: stock rises to $92.00 Assuming no change in implied volatility, the long puts are now worth approximately 2.30; loss so far = 5.00 Short puts expire worthless: profit = 5.00 No exercise Total position = (5.00) + 5.00 = breakeven 4. Scenario: stock falls to $80.00 Assuming no change in implied volatility, the long puts are now worth approximately 6.00; loss so far = 1.30 Short puts expire worthless: profit = 5.00 No exercise Total position = (1.30) + 5.00 = profit so far of 3.70 5. Scenario: stock falls to $75.00 Assuming no change in implied volatility, the long puts are now worth approximately 8.55; profit so far = 1.25 Short puts exercised at $80.00: Buy stock @ 80.00 Sell stock @ 75.00 Loss = 5.00 Sell long put for a profit = 1.25 Keep short put premium = 5.00 Loss on Exercise = 5.00 Total position = 1.25 profit If you tried to exercise the bought put: Procedure: exercise bought puts @ $80.00; sell stock @ $80.00. Buy put @ 7.30 Sell put @ 5.00 Net cost = 2.30 Buy stock @ 80.00 Sell stock @ 80.00 Net = 0.00 Total = (2.30) + 0.00 = loss of 2.30 (less than the 1.25 profit above) Lesson: Never exercise a long term option because you’ll miss out on Time Value!	6/6/2008
9	p 76	2.12 Diagonal Put Proficiency Direction Volatility Asset Legs Max Risk Max Reward Strategy Type N/A 1 Advanced Bullish n Long Put Capped Capped Income n Short Put 2.12.1 Description The Diagonal Put is a variation of a Diagonal Call where you substitute the calls with puts. Ultimately the strategy is virtually identical. The question lies in whether you can achieve a better yield using the puts versus the calls. The Diagonal Put solves the problems experienced with the Calendar Put, in that the shape of the risk profile (see the following) is more akin to the Covered Call, which is what we want. Yet the Diagonal Put is going to be a far cheaper investment, particularly because the long put element is OTM! If the stock rises explosively, then unlike the Calendar Put, the Diagonal Put done correctly won’t become loss-making. The key is not to get too greedy! The bought option is long-term and OTM, and the short option is short-term and ITM. If the stock rises above the higher (short) strike, your short put will expire worthless, and the long put will decrease in value. The long put will reduce in value because it is further OTM and there will have been some time decay, too. Buy put Sell put Diagonal Put Steps to Trading a Diagonal Put 1. Buy a lower strike long-term expiration put. 2. Sell a higher strike shorter term put (say monthly). Steps In - Try to ensure that the trend is upward or rangebound and identify a clear area of support. Steps Out - Manage your position according to the rules defined in your Trading Plan. - Reverse the position if the stock trades outside your lower or higher stop loss areas. - If the stock rests between the two strike prices, you’ll be exercised, whereupon you must sell the long put and use the proceeds to buy the stock at the higher strike price (and then sell it at the market price).	As we can see, by exercising our long put, we would forego the time value portion of the option and the trade would become a loss. 2.12 Diagonal Put Proficiency Direction Volatility Asset Legs Max Risk Max Reward Strategy Type N/A 1 Advanced Bearish n Short Put Capped Capped Income n Long Put 2.12.1 Description The Diagonal Put is the put version of the Diagonal Call. Instead of buying lower strike calls you buy higher strike puts. Instead of selling higher strike calls with less time to expiration, you sell lower strike puts with less time to expiration. Ultimately the strategy is virtually identical but in the exact reverse. You make an income out of a stock that is falling in value. The Diagonal Put solves the problems experienced with the Calendar Put, in that the shape of the risk profile (see below) is more akin to the Covered Call, which is what we want. Yet the Diagonal Put is going to be a far cheaper investment, particularly because the long put element is OTM! If the stock rises explosively, then, unlike the Calendar Put, the Diagonal Put, done correctly, won’t become loss making. The key is not to get too greedy! The bought option is long term and OTM, and the short option is short term and ITM. If the stock rises above the higher (short) strike, your short put will expire worthless, and the long put will decrease in value. The long put will reduce in value because it is further OTM and there will have been some time decay too. Sell put Buy put Diagonal Put Steps to Trading a Diagonal Put 1. Sell a lower strike short term expiration put (say monthly). 2. Buy a higher strike longer term put. Steps In - Try to ensure that the trend is downward or rangebound and identify a clear area of resistance.	6/6/2008
9	p 77	- If the stock rises above the higher strike but is still below your higher stop loss, then the short put will expire worthless, and you’ll have the chance to write another put for the following month, though your long put will have reduced in value significantly. 2.12.2 Context Outlook - With a Diagonal Put, your outlook is bullish. Rationale - To create a net credit trade by buying the longer term OTM put options and selling the ITM put options while creating the same risk profile as a Diagonal Call Spread. Net Position - This is a net credit trade because your bought puts are OTM and therefore cheaper than your short ITM puts. This of course can depend on the strikes that you choose and the different expiration dates that you choose (i.e., you can create a net debit if your long put is far enough away from expiration, your short put has a very short time to expiration, and the strike prices are quite close together). Effect of Time Decay - Time decay affects your Diagonal Put trade in a mixed fashion. It erodes the value of the long put but can help you with your income strategy by eroding the value faster on the short put, depending on how far ITM it is. Appropriate Time Period to Trade - You will be safest to choose a long time to expiration with the long put and a shorter time for the short put. Selecting the Stock - Choose from stocks with adequate liquidity, preferably over 500,000 Average Daily Volume (ADV). - Try to ensure that the trend is upward or rangebound and identify a clear area of support. Selecting the Option - Choose options with adequate liquidity; open interest should be at least 100, preferably 500.	Steps Out - Manage your position according to the rules defined in your Trading Plan. - If the stock closes below the lower strike at expiration, you will be exercised. You will sell your long put, buy the stock at the short put strike price, deliv- er it at the lower market price, while having profited from both the option premium you received and the uplift in the long put option premium. Exer- cise of the short option is automatic. Do not exercise the long option or you will forfeit its time value. If you’re going to be exercised then it’s best to sim- ply reverse the entire position and close the trade the day before expiration. - If the stock remains above the lower strike but below your stop loss, let the short put expire worthless and keep the entire premium. If you like you can then write another put for the following month if you’re still neutral to bear ish on the stock. - If the stock rises above your stop loss, then either sell the long option (if you’re approved for naked put writing), or reverse the entire position. 2.12.2 Context Outlook - With a Diagonal Put, your outlook is bearish. Rationale - To generate income against your longer term long put position by selling puts and receiving the premium. Net Position - This is a net debit transaction because your bought puts will be more expen- sive than your sold puts which are OTM and have less time value. - Your maximum risk on the trade itself is limited to the net debit of the bought puts less the sold puts. Your maximum reward occurs when the stock price is at the sold put (lower) strike price at the expiration of the sold put. Effect of Time Decay - Time decay affects your Diagonal Put trade in a mixed fashion. It erodes the value of the long put but can help you with your income strategy by eroding the value faster on the short put. Appropriate Time Period to Trade - You will be safest to choose a long time to expiration with the long put and a shorter time (say 1 month) for the short put.	6/6/2008
9	p 78	- Lower Strike—Look for a deep OTM (ideally around 10220% lower) strike below the current stock price. - Higher Strike—Look for ITM (higher) by more than one strike to raise enough income on the trade. - Expirations—Look at either of the next two expirations for the short option and compare monthly yields. Look for over six months for the long option. 2.12.3 Risk Profile - Maximum Risk [Higher strike] 2 [maximum long put value at the first expiration] 2 [net credit] - Maximum Reward Depends on the value of the long put option at the time of the short put expiration - Breakeven Down Depends on the value of the long put option at the time of the short put expiration - Breakeven Up Depends on the value of the long put option at the time of the short put expiration 2.12.4 Greeks	Selecting the Stock - Choose from stocks with adequate liquidity, preferably over 500,000 Average Daily Volume (ADV). - Try to ensure that the trend is downward or rangebound and identify a clear area of resistance. Selecting the Option - Choose options with adequate liquidity, open interest should be at least 100, preferably 500. - Lower Strike—Look for OTM by more than one strike below the current stock price to enable the long put to rise in value if you get exercised on the short put. - Higher Strike—Look for either the ATM or ITM (ideally about 10-20% ITM preferred) strike above the current stock price. If you’re bearish, then choose a higher strike, if neutral choose the ATM strike in anticipation of writing more puts in the future. - Expirations—Look at either of the next two expirations for the short option and compare monthly yields. Look for over six months for the long option. 2.12.3 Risk Profile - Maximum Risk Limited to the net debit paid - Maximum Reward [long put value at the time of the short put expiration, when the stock price is at the lower strike price] less [net debit] - Breakeven Down Depends on the value of the long put option at the time of the short put expiration. - Breakeven Up Depends on the value of the long put option at the time of the short put expiration.	6/6/2008
9	p 79	2.12.5 Advantages and Disadvantages Advantages - Generate (monthly) income. - Can profit from rangebound stocks and make a higher yield than with a Covered Call or Naked Put. Disadvantages - Capped upside if the stock rises. - Uncapped downside—you can lose more than your net debit with this strategy. - Can lose on the upside if the stock rises significantly. - High yield does not necessarily mean a profitable or high probability profitable trade. 2.12.6 Exiting the Trade Exiting the Position - With this strategy, you can simply unravel the spread by buying back the puts you sold and selling the puts you bought in the first place. - Advanced traders may leg up and down as the underlying asset fluctuates up and down. In this way, you can take incremental profits before the expiration of the trade. Mitigating a Loss - Unravel the trade as described previously. - Advanced traders may choose to only partially unravel the spread leg-by-leg. In this way, they will leave one leg of the spread exposed in order to attempt to profit from it. 2.12.7 Example ABCD is trading at $26.00 on May 11, 2004, with Historical Volatility at 40%. - Buy January 2006 25 puts at $4.00 - Sell June 2004 27.50 puts at $2.20 At June Expiration 1. Scenario: stock falls to $23.00 Long puts worth approximately 5.00; profit so far 5 1.00 Short puts expire $4.50 ITM	2.12.4 Greeks 2.12.5 Advantages and Disadvantages Advantages - Generate (monthly) income. - Can profit from rangebound stocks and make a higher yield than with a Covered Put or Naked Call. Disadvantages - Capped profits if the stock falls. - If poorly constructed, the Diagonal Put can lose if the stock falls significantly and you haven’t either bought deep enough ITM, or sold far enough OTM away. - High yield does not necessarily mean a profitable or high probability profitable trade. 2.12.6 Exiting the Trade Exiting the Position - With this strategy you can simply unravel the spread by buying back the puts you sold and selling the puts you bought in the first place.	6/6/2008
9	p 80	Procedure: sell bought puts; buy stock at higher strike price and sell at current price Exercised at $27.50 Buy stock at 27.50 Sell stock at 23.00 Loss 5 4.50 Sell long put for a profit 5 1.00 Keep short put premium 5 2.20 Loss on Exercise 5 4.50 Total position 5 1.30 loss If you tried to exercise the bought put: Procedure: exercise bought puts at $25.00; buy stock at $27.50 for exercised sold put Buy put at 4.00 Sell put at 2.20 Net cost 5 1.80 Buy stock at 27.50 Sell stock at 25.00 Net loss at 2.50 Total 5 1.80 1 2.50 5 loss of 4.30 Lesson: Never exercise a long-term option because you’ll miss out on Time Value! 2. Scenario: stock falls to $25.00 Long puts worth approximately 4.20; profit so far 5 0.20 Short puts expire 2.50 ITM Procedure: sell bought puts; buy stock at higher strike price and sell at current price Exercised at $27.50 Buy stock at 27.50 Sell stock at 25.00 Loss 5 2.50 Sell long put for a profit 5 0.20 Keep short put premium 5 2.20 Loss on Exercise 5 2.50 Total position 5 0.10 loss	- Advanced traders may leg up and down as the underlying asset fluctuates up and down. In this way you can take incremental profits before the expiration of the trade. Mitigating a Loss - Unravel the trade as above. - Advanced traders may choose to only partially unravel the spread leg by leg. In this way they will leave one leg of the spread exposed in order to attempt to profit from it. 2.12.7 Example ABCD is trading at $81.60 on January 2, 2008, with Historical Volatility at 40%. - Sell March 2008 $75.00 puts @ $3.40 - Buy June 2008 $95.00 puts @ $16.70 This is a well placed trade where the bought put is deep ITM meaning a high inverse delta, so the put will gain $1.00 as the stock falls by $1.00. The short put is some way OTM but still gives a decent premium. Both of these legs are exactly how you want them to be, and therefore the trade will be uncomplicated. At the March Expiration Net Debit Higher strike put premium – lower strike put premium $16.70 – $3.40 $13.30 Maximum Risk Higher strike put premium – lower strike put premium $16.70 – $3.40 $13.30 Maximum Reward [long put value at the time of the short put expiration, when the stock price is at the lower strike price] less [net debit] Assuming implied volatility remains at 40%, here the maximum reward = $6.94 Breakeven Depends on the value of the long put option at the time of the short put expiration. Assuming implied volatility remains at 40%, here the breakeven = 84.04. Because the long put is deep ITM and the short put is OTM enough, we only have a single breakeven point with this trade. This is good news and the sign of a well place diagonal spread trade. It also means that no matter how far the stock price falls we’ll still make a profit with this trade. If our long put wasn’t deep enough ITM then this may not have been the case.	6/6/2008
9	p 81	If you tried to exercise the bought put: Procedure: exercise bought puts at $25.00; buy stock at $27.50 for exercised sold put Buy put at 4.00 Sell put at 2.20 Net cost 5 1.80 Buy stock at 27.50 Sell stock at 25.00 Net loss at 2.50 Total 5 1.80 1 2.50 5 loss of 4.30 Lesson: Never exercise a long-term option because you’ll miss out on Time Value! 3. Scenario: stock stays at $26.00 Long puts worth approximately 3.90; loss so far 5 0.10 Short puts expire $1.50 ITM Procedure: sell bought puts; buy stock at higher strike price and sell at current price Exercised at $27.50 Buy stock at 27.50 Sell stock at 26.00 Loss 5 1.50 Sell long put for a loss 5 0.10 Keep short put premium 5 2.20 Loss on Exercise 5 1.50 Total position 5 0.60 profit If you tried to exercise the bought put: Procedure: exercise bought puts at $25.00; buy stock at $27.50 for exercised sold put Buy put at 4.00 Sell put at 2.20 Net cost 5 1.80 Buy stock at 27.50 Sell stock at 25.00 Net loss at 2.50 Total 5 $1.80 1 $2.50 5 loss of $4.30 Lesson: Don’t exercise a long-term option because you’ll miss out on Time Value!	Let’s look at a few scenarios of this strategy: At the March Expiration 1. Scenario: stock rises to $150.00 Assuming no change in implied volatility, the long puts are now worth approximately zero; loss so far = 16.70 Short puts expire worthless: profit = 3.40 No exercise Total position = (16.70) + 3.40 = loss so far of 13.30 2. Scenario: stock rises to $90.00 Assuming no change in implied volatility, the long puts are now worth approximately 9.63; loss so far = 7.07 Short puts expire worthless: profit = 3.40 No exercise Total position = (7.07) + 3.40 = loss so far of 3.67 3. Scenario: stock rises to $84.00 Assuming no change in implied volatility, the long puts are now worth approximately 13.33; loss so far = 3.40 Short puts expire worthless: profit = 3.40	6/6/2008
9	p 82	4. Scenario: stock rises to $27.50 Long puts worth approximately 3.40; loss so far 5 0.60 Short puts expire worthless; profit 2.20 No exercise Total position 5 4.00 1 2.20 2 0.60 5 5.60 5 profit of 1.60 5. Scenario: stock rises to $30.00 Long puts worth approximately 2.75; loss so far 5 1.25 Short puts expire worthless; profit 2.20 No exercise Total position 5 4.00 1 2.20 2 1.25 5 4.95 5 profit of 0.95 2.13 Covered Put (Also Known as a Married Put) Proficiency Direction Volatility Asset Legs Max Risk Max Reward Strategy Type N/A 1 Advanced Bearish n Short Stock Uncapped Capped Income n Short Put	No exercise Total position = (3.40) + 3.40 = breakeven 4. Scenario: stock falls to $75.00 Assuming implied volatility rises to 60%, the long puts are now worth approximately 22.40; profit so far = 5.70 Short puts expire worthless: profit = 3.40 No exercise Total position = 5.70 + 3.40 = profit so far of 9.10 5. Scenario: stock falls to $60.00 Assuming implied volatility rises to 70%, the long puts are now worth approximately 35.40; profit so far = 18.70 Short puts exercised at $75.00: Buy stock @ 75.00 Sell stock @ 60.00 Loss = 15.00 Sell long put for a profit = 18.70 Keep short put premium = 3.40 Loss on Exercise = 15.00 Total position = 7.10 profit If you tried to exercise the bought put: Procedure: exercise bought puts @ $95.00; sell stock @ $95.00. Buy put @ 16.70 Sell put @ 3.40 Net cost = 13.30 Buy stock @ 75.00 Sell stock @ 95.00 Net profit = 20.00 Total = (13.30) + 20.00 = profit of 6.70 (less than the 7.10 profit above) Lesson: Never exercise a long term option because you’ll miss out on Time Value! In this situation, even though implied volatility had risen significantly the puts were only worth a small amount over their intrinsic value. It’s likely that such a precipitous drop in share price would be accompanied with a sharp rise in implied volatility, perhaps to more than 70%, in which case the long puts would be worth more. As mentioned above, this example is a particularly well constructed diagonal spread, because the long side is deep ITM and the short side is sufficiently OTM. This means that even as the stock drops lower and lower, this particular Diagonal Put will continue to make virtually the same amount of profit.	6/6/2008
9	p 83	2.13.1 Description The Covered Put is the opposite process to a Covered Call, and it achieves the opposite risk profile. Whereas the Covered Call is bullish, the Covered Put is a bearish income strategy, where you receive a substantial net credit for shorting both the put and the stock simultaneously to create the spread. The concept is that in shorting the stock, you then sell an Out of the Money put option on a monthly basis as a means of collecting rent (or a dividend) while you are short the stock. The trade-off is that an OTM Covered Put will give a higher potential yield but less cushion, whereas an ITM Covered Put will give a lower yield but much more cushion. This is not a recommended strategy (partly because it’s a little confusing!), but “you pays your money, you takes your chances” on this one! If the stock falls below the put strike, you’ll be exercised and will have to buy the stock at the strike price . . . but you make a profit because you’ve already shorted it, so the purchase simply closes your stock position, and you retain the premium for the sold put. (You’re covered because you shorted the stock in the first place.) If the stock remains static, then you simply collect the put premium. If the stock rises, you have the cushion of the put premium you collected. Short stock Sell OTM put Covered Put Steps to Trading a Covered Put 1. Short sell the stock. 2. Sell puts one strike price out of the money [OTM] (i.e., puts with a strike price lower than the stock). - If the stock is purchased simultaneously with writing the call contract, the strategy is commonly referred to as a “buy-write.” - Generally, only sell the puts on a monthly basis. In this way you will capture more in premiums over several months, provided you are not exercised. Selling premium every month will net you more over a period of time than selling premium a long way out. Remember that whenever you are selling options premium, time decay works in your favor. Time decay is at its fastest rate in the last 20 trading days (i.e., the last month), so when you sell option premiums, it is best to sell it with a month left, and do it again the following month. - Remember that your maximum gain is capped when the stock falls to the level of the put strike price.	Let’s take the example to even more extreme levels: 6. Scenario: stock falls to $30.00 Assuming implied volatility has risen to 150%, the long puts are now worth approximately 65.20; profit so far = 48.50 Short puts exercised at $75.00: Buy stock @ 75.00 Sell stock @ 30.00 Loss = 45.00 Sell long put for a profit = 48.50 Keep short put premium = 3.40 Loss on Exercise = 45.00 Total position = 6.90 profit As we can see, the profit level is similar to when the stock dropped to $60.00. It’s important to understand that if you had bought a Near-the-Money put instead, then the profits would have dwindled as the stock fell. This seems counter intuitive because the strategy is bearish and thrives on the stock falling. Well, this is only the case if you buy a deep ITM put in the first place. If you had bought a Near-the-Money put then the strategy would benefit from rangebound stock price action. However, if the stock price plummeted, the strategy, despite being bearish in nature, could start to make losses even though you were right in terms of your market direction. A similar concept applies in terms of the short leg. Your short put should be near enough to generate a decent income yield but not so close that the stock won’t have a chance to move and make the long side profitable. When trading diagonal spreads I prefer not to be greedy and will buy a deep ITM option for my long leg, and will never sell an option with a strike too close to the current stock price. This way I won’t get punished for being “too” right. Just so you can see how this works, let’s adjust the above example as follows: - Instead of buying the 95 strike put for 16.70 we’re going to buy the 85 strike put for 10.70. - Instead of selling the 75 strike put for 3.40 we’re going to sell the 80 strike put for 5.00. Now, initially this looks better as our yield is almost 50% instead of 20%. However, look at the risk profile on the following page and compare it to the original one above. Do you see the difference? With these tighter strikes, the strategy will actually make a loss as the stock falls below $70. With our wider strikes we kept on making money, no matter how far the stock fell. We sacrificed the initial yield in order to keep making a profit in the event of a real surprise to the downside. Ultimately the Diagonal Put is a bearish strategy. We don’t want to be punished for getting it right.	6/6/2008
9	p 84	- If trading U.S. stocks and options, you will be required to sell (or be short in) 100 shares for every put contract that you sell. Steps In - Try to ensure that the trend is downward or rangebound and identify a clear area of resistance. Steps Out - Manage your position according to the rules defined in your Trading Plan. - If the stock closes below the strike at expiration, you will be exercised. You will have to buy back the stock at the strike price, having profited from both the option premium you received and the fall in stock price to reach the lower strike price. - If the stock remains above the strike but below your stop loss, let the put expire worthless and keep the entire premium. If you like, you can then write another put for the following month. - If the stock rises above your stop loss, then either buy back the stock (if you’re approved for naked put writing) or reverse the entire position (the put will be cheap to buy back). 2.13.2 Context Outlook - With a Covered Put, your outlook is neutral to bearish. You expect a steady decline. Rationale - To sell (short) a stock for the medium or long term with the aim of capturing monthly income by selling puts every month. This is like collecting rent after selling the stock. - If the stock rises, you will lose money because you have shorted the stock. - If the stock falls, you will make money because of your short position on the stock; however, you will only make limited profit because if the stock declines down to the sold put strike price, you will be exercised at that strike price. This means that you will have to buy the stock at the sold put strike price if the stock declines to that level at expiration.	In real world trading I would strongly advise you to virtual trade the diagonals and see for yourself what happens in all scenarios. I’m cautious by nature and can’t bear to lose when I’m right, let alone when I’m wrong! By being conservative with my diagonals, I’m never exposed to a nasty surprise. 2.13 Covered Put (Also Known as a Married Put) Proficiency Direction Volatility Asset Legs Max Risk Max Reward Strategy Type N/A 1 Advanced Bearish n Short Stock Uncapped Capped Income n Short Put 2.13.1 Description The Covered Put is the opposite process to a Covered Call, and it achieves the opposite risk profile. Whereas the Covered Call is bullish, the Covered Put is a bearish income strategy, where you receive a substantial net credit for shorting both the put and the stock simultaneously to create the spread. The concept is that in shorting the stock, you then sell an Out of the Money put option on a monthly basis as a means of collecting rent (or a dividend) while you are short the stock. The trade-off is that an OTM Covered Put will give a higher potential yield but less cushion, whereas an ITM Covered Put will give a lower yield but much more	6/6/2008
9	p 85	Net Position - This is a net credit transaction because you are selling the stock and taking in a premium for the sold put options. - Your maximum risk is unlimited if the stock price rises. Effect of Time Decay - Time decay is helpful to your trade here because it should erode the value of the put you sold. Provided that the stock does not hit the strike price at expiration, you will be able to retain the entire option premium for the trade. Appropriate Time Period to Trade - Sell the puts on a monthly basis. Selecting the Stock - Choose from stocks with adequate liquidity, preferably over 500,000 Average Daily Volume (ADV). - Try to ensure that the trend is downward or rangebound and identify a clear area of resistance. Selecting the Option - Choose options with adequate liquidity; open interest should be at least 100, preferably 500. - Strike—Look for either the ATM or just OTM (lower) strike below the current stock. If you’re confident of the stock falling, then choose a lower strike; if neutral, choose the ATM strike. - Expiration—Look at either of the next two expirations and compare monthly yields. 2.13.3 Risk Profile - Maximum Risk Uncapped - Maximum Reward [Shorted stock price 2 strike price] 1 put premium - Breakeven [Shorted stock price 1 put premium]	cushion. This is not a recommended strategy (partly because it’s a little confusing!), but “you pays your money, you takes your chances” on this one! If the stock falls below the put strike, you’ll be exercised and will have to buy the stock at the strike price . . . but you make a profit because you’ve already shorted it, so the purchase simply closes your stock position, and you retain the premium for the sold put. (You’re covered because you shorted the stock in the first place.) If the stock remains static, then you simply collect the put premium. If the stock rises, you have the cushion of the put premium you collected. Short stock Sell OTM put Covered Put Steps to Trading a Covered Put 1. Short sell the stock. 2. Sell puts one strike price out of the money [OTM] (i.e., puts with a strike price lower than the stock). - If the stock is purchased simultaneously with writing the call contract, the strategy is commonly referred to as a “buy-write.” - Generally, only sell the puts on a monthly basis. In this way you will capture more in premiums over several months, provided you are not exercised. Selling premium every month will net you more over a period of time than selling premium a long way out. Remember that whenever you are selling options premium, time decay works in your favor. Time decay is at its fastest rate in the last 20 trading days (i.e., the last month), so when you sell option premiums, it is best to sell it with a month left, and do it again the following month. - Remember that your maximum gain is capped when the stock falls to the level of the put strike price. - If trading U.S. stocks and options, you will be required to sell (or be short in) 100 shares for every put contract that you sell. Steps In - Try to ensure that the trend is downward or rangebound and identify a clear area of resistance. Steps Out - Manage your position according to the rules defined in your Trading Plan. - If the stock closes below the strike at expiration, you will be exercised. You will have to buy back the stock at the strike price, having profited from both the option premium you received and the fall in stock price to reach the lower strike price.	6/6/2008
9	p 86	2.13.4 Greeks 2.13.5 Advantages and Disadvantages Advantages - Generate monthly income. - Can profit from rangebound or bearish stocks with no capital outlay. Disadvantages - Capped upside if the stock falls. - Uncapped downside if the stock rises. 2.13.6 Exiting the Trade Exiting the Position - If the share falls below the strike price, you will be exercised and therefore make a limited profit.	- If the stock remains above the strike but below your stop loss, let the put expire worthless and keep the entire premium. If you like, you can then write another put for the following month. - If the stock rises above your stop loss, then either buy back the stock (if you’re approved for naked put writing) or reverse the entire position (the put will be cheap to buy back). 2.13.2 Context Outlook - With a Covered Put, your outlook is neutral to bearish. You expect a steady decline. Rationale - To sell (short) a stock for the medium or long term with the aim of capturing monthly income by selling puts every month. This is like collecting rent after selling the stock. - If the stock rises, you will lose money because you have shorted the stock. - If the stock falls, you will make money because of your short position on the stock; however, you will only make limited profit because if the stock declines down to the sold put strike price, you will be exercised at that strike price. This means that you will have to buy the stock at the sold put strike price if the stock declines to that level at expiration. Net Position - This is a net credit transaction because you are selling the stock and taking in a premium for the sold put options. - Your maximum risk is unlimited if the stock price rises. Effect of Time Decay - Time decay is helpful to your trade here because it should erode the value of the put you sold. Provided that the stock does not hit the strike price at expiration, you will be able to retain the entire option premium for the trade. Appropriate Time Period to Trade - Sell the puts on a monthly basis. Selecting the Stock - Choose from stocks with adequate liquidity, preferably over 500,000 Average Daily Volume (ADV). - Try to ensure that the trend is downward or rangebound and identify a clear area of resistance.	6/6/2008
9	p 87	- If the share rises above the strike price (plus premium you received), you will be losing money. - If the share rises in this way, then your exit depends on what type of account you have: - If your account permits you to sell naked options, then you will be able to buy back the share and let the sold put option expire worthless. Because the put option will have declined in value so much, you may consider buying it back to avoid any contingent losses that could occur if the share suddenly bounced back down after you sold it! - If your account does not permit you to sell naked options, then you should buy back the options you sold and consider buying back the stock, too. This is the safest way to exit a losing covered put trade. Mitigating a Loss - Either buy back the share or buy back both the share and the put option you sold. 2.13.7 Example ABCD is trading at $50.00 on February 25, 2004. Sell short the stock for $49.75. Sell the March 2004 45 strike put for $1.50. You Receive Stock price 1 put premium 49.75 1 1.50 5 51.25 Maximum Risk Uncapped Maximum Reward [Shorted stock price 2 strike price] 1 put premium received 49.75 2 45.00 1 1.50 5 6.25 Breakeven Shorted stock price 1 put premium received 49.75 1 1.50 5 51.25 Maximum ROI 13.89% Cushion (from Breakeven) $1.50 or 3.02%	Selecting the Option - Choose options with adequate liquidity; open interest should be at least 100, preferably 500. - Strike—Look for either the ATM or just OTM (lower) strike below the current stock. If you’re confident of the stock falling, then choose a lower strike; if neutral, choose the ATM strike. - Expiration—Look at either of the next two expirations and compare monthly yields. 2.13.3 Risk Profile - Maximum Risk Uncapped - Maximum Reward [Shorted stock price 2 strike price] 1 put premium - Breakeven [Shorted stock price 1 put premium] 2.13.4 Greeks 2.13.5 Advantages and Disadvantages Advantages - Generate monthly income. - Can profit from rangebound or bearish stocks with no capital outlay.	6/6/2008
9	p 88	was blank page.	Disadvantages - Capped upside if the stock falls. - Uncapped downside if the stock rises. 2.13.6 Exiting the Trade Exiting the Position - If the share falls below the strike price, you will be exercised and therefore make a limited profit. - If the share rises above the strike price (plus premium you received), you will be losing money. - If the share rises in this way, then your exit depends on what type of account you have: - If your account permits you to sell naked options, then you will be able to buy back the share and let the sold put option expire worthless. Because the put option will have declined in value so much, you may consider buying it back to avoid any contingent losses that could occur if the share suddenly bounced back down after you sold it! - If your account does not permit you to sell naked options, then you should buy back the options you sold and consider buying back the stock, too. This is the safest way to exit a losing covered put trade. Mitigating a Loss - Either buy back the share or buy back both the share and the put option you sold. 2.13.7 Example ABCD is trading at $50.00 on February 25, 2004. Sell short the stock for $49.75. Sell the March 2004 45 strike put for $1.50. You Receive Stock price 1 put premium 49.75 1 1.50 5 51.25 Maximum Risk Uncapped Maximum Reward [Shorted stock price 2 strike price] 1 put premium received 49.75 2 45.00 1 1.50 5 6.25 Breakeven Shorted stock price 1 put premium received 49.75 1 1.50 5 51.25 Maximum ROI 13.89% Cushion (from Breakeven) $1.50 or 3.02%	6/6/2008
9	p 68	2. Scenario: stock falls to $25.00 Long calls worth approximately 5.46; loss so far = 1.16 Short calls expire worthless; profit 0.55 No exercise Total position = 6.60 + 0.55 - 1.16 = 5.99 = loss of 0.61 3. Scenario: stock stays at $26.00 Long calls worth approximately 6.09; loss so far = 0.51 Short calls expire worthless; profit 0.55 No exercise Total position = 6.60 + 0.55 - 0.49 = 6.64 = profit of 0.04	2. Scenario: stock falls to $25.00 Long calls worth approximately 5.46; loss so far = 1.14 Short calls expire worthless; profit 0.55 No exercise Total position = 6.60 + 0.55 - 1.14 = 6.01 = loss of 0.59 3. Scenario: stock stays at $26.00 Long calls worth approximately 6.09; loss so far = 0.51 Short calls expire worthless; profit 0.55 No exercise Total position = 6.60 + 0.51 - 0.49 = 6.64 = profit of 0.04	9/12/2008
10	p iv	Tenth Printing December 2008	Eleventh Printing August 2009	7/28/2009
10	p 76	The Diagonal Put is the put version of the Diagonal Call. Instead of buying lower strike calls you buy higher strike puts. Instead of selling higher strike calls with less time to expiration, you sell lower strike puts with less time to expiration. Ultimately the strategy is virtually identical but in the exact reverse. You make an income out of a stock that is falling in value. The Diagonal Put solves the problems experienced with the Calendar Put, in that the shape of the risk profile (see below) is more akin to the Covered Call, which is what we want. Yet the Diagonal Put is going to be a far cheaper investment, particularly because the long put element is OTM! If the stock rises explosively, then, unlike the Calendar Put, the Diagonal Put, done correctly, won’t become loss making. The key is not to get too greedy! The bought option is long term and OTM, and the short option is short term and ITM. If the stock rises above the higher (short) strike, your short put will expire worthless, and the long put will decrease in value. The long put will reduce in value because it is further OTM and there will have been some time decay too.	The Diagonal Put is the put equivalent of the Diagonal Call. Instead of buying lower strike calls you buy higher strike puts. Instead of selling higher strike calls with less time to expiration, you sell lower strike puts with less time to expiration. Ultimately the strategy is the exact reverse. Here you derive income from a stock that is falling or rangebound. The Diagonal Put solves the problems experienced with the Calendar Put, in that the shape of the risk profile (see below) is more akin to the Covered Put, which is preferable. The Diagonal Put is going to be easier to trade than a Covered Put because we don’t margin as we’re not shorting the stock here. If the stock declines rapidly, then unlike the Calendar Put, the Diagonal Put (done correctly) won’t become loss making. The key is not to get too greedy with your yields. The bought option is ITM and has longer to expiration, and the short option is OTM and short term. If the stock remains above the lower (short) strike, your short put will expire worthless, meaning you keep the premium. If the stock price doesn’t move the long put will decrease in value through time decay, though this should be minimal because the long put should be deep ITM, meaning the premium contained minimal time value. If the stock falls below the lower (short0 put strike, it will be exercised by or at expiration, meaning you will be “put” the stock at that lower strike price—this means you’d have to buy the stock at the lower strike price. In the meantime, the stock may fall further buty your long put will have increased in value.	7/28/2009
13	p iv	Eleventh Printing: August 2009	Fourteenth Printing: August 2013	7/9/2013
13	p 147	Net Debit Premiums bought $4.20 - $3.80 = $8.00 Maximum Risk Net debit 2 difference in premiums $8.00 - $5.00 = $3.00	Net Debit Premiums bought $4.20 + $3.80 = $8.00 Maximum Risk Net debit 2 difference in strikes $8.00 - $5.00 = $3.00	8/6/2013
13	p 156	Net Credit Premiums sold 2 premiums bought $2.57 + $7.85 - $9.64 = $0.76	Net Credit Premiums sold 2 premiums bought $2.57 + $7.85 - $9.66 = $0.76	8/6/2013
13	p 176		Sideways strategy flow chart: Second reference to Long Call Condor changed to Long Put Condor	8/6/2013
13	p 198	Long condors are identical to long butterflies, with the exception that the two middle bought options have different strikes.	Long condors are identical to long butterflies, with the exception that the two middle options have different strikes.	8/6/2013
13	p 216	ABCD is trading at $50.00 on May 17, 2004. Maximum Reward: $60.00 - $50.00 - $4.02 = $5.98	ABCD is trading at $55.00 on May 17, 2004. Maximum Reward: $60.00 - $55.00 - $0.98 = $4.02	8/6/2013
13	p 221	Higher Strike—One or two strikes higher than the bought strike; use online tools to find the optimum yields and breakeven points at and before expiration.	Higher Strike—One or two strikes higher than the sold strike; use online tools to find the optimum yields and breakeven points at and before expiration.	8/6/2013
13	p 225	To execute a bearish trade for little to no cost while reducing your maximum risk. You are looking for the stock to rise significantly.	To execute a bearish trade for little to no cost while reducing your maximum risk. You are looking for the stock to fall significantly.	8/6/2013
13	p 253	Uncapped reward if the stock falls.	Uncapped reward until the stock falls to zero.	8/6/2013
13	p 256	Your maximum risk is limited if the stock rises.	Your maximum risk is limited if the stock does not move decisively.	8/6/2013
13	p 263	1. Buy the stock (if trading U.S. stocks, sell 50 shares for every call contract you buy). 2. Sell two ATM calls per 100 shares you sell. If the current stock price isn’t near the nearest strike price, then it’s better to choose an OTM strike (higher than the current stock price).	1. Buy the stock (if trading U.S. stocks, buy 50 shares for every call contract you sell). 2. Sell two ATM calls per 100 shares you buy. If the current stock price isn’t near the nearest strike price, then it’s better to choose an OTM strike (higher than the current stock price).	8/6/2013
13	p 267	1. Sell the stock (if trading U.S. stocks, sell 50 shares for every put contract you buy). 2. Sell two ATM calls per 100 shares you buy. If the current stock price isn’t near the nearest strike price, then it’s better to choose an OTM strike (higher than the current stock price).	1. Sell the stock (if trading U.S. stocks, sell 50 shares for every put contract you sell). 2. Sell two ATM puts per 100 shares you buy. If the current stock price isn’t near the nearest strike price, then it’s better to choose an OTM strike (lower than the current stock price).	8/6/2013
13	p xxxv	Acknowledgments I want to take this opportunity to express my gratitude to my colleagues at OptionEasy, particularly Paul Doidge, whose diligence and ability are phenomenal. Again, thanks to Geoffrey Glassborow for being such a great mentor, and Dominic and Lulu for being like family. Finally, a big thank you to those students who have attended my workshops. You cannot imagine how much I’ve learned from you.	Acknowledgments First, to my colleagues at FlagTrader, whose diligence and ability to have enabled us to create institutional grade tools. To Lulu and Dominic for being extraordinary family friends. And finally, to the students who have attended my workshops. I’ve learned so much from you.	8/19/2013