THE VALUE LINE Guide to Option Strategies How to Invest Using Options If you need assistance with our service, feel free to contact us at 1-800-825-8354 Value Line Publishing, Inc. 485 Lexington Avenue New York, NY 10017-2630 www.valueline.com TABLE OF CONTENTS List of Tables ...................................................................................................................................... 4 List of Graphs ..................................................................................................................................... 4 Preface - Options & the Value Line Daily Options Survey .............................................................. 5 Introduction - The Chapters Ahead .................................................................................................. 6 Chapter 1 – Option Basics ................................................................................................................. 7 Defining Some Terms ................................................................................................................................. 7 Some Sample Premiums ............................................................................................................................. 7 Buying a Call ............................................................................................................................................... 8 Buying a Put ................................................................................................................................................ 8 Selling before expiration ............................................................................................................................ 9 Writing Uncovered or “Naked” Options ................................................................................................ 10 Writing Covered Calls .............................................................................................................................. 10 Which strategy is best? ............................................................................................................................. 11 Additional Information ............................................................................................................................ 11 Chapter 2 – Finding the Most Attractive Options ........................................................................... 12 Value Line’s Common and Option Ranks .............................................................................................. 12 How We Rank Options ............................................................................................................................. 12 Using our Selected Options ...................................................................................................................... 13 Finding Options by Stock Ticker............................................................................................................. 14 Using our Quick Screener ........................................................................................................................ 15 Using our Option Screener ....................................................................................................................... 15 Getting Started .......................................................................................................................................... 16 Chapter 3 – Spotlight on Buying Calls ............................................................................................ 17 Paying Premium ........................................................................................................................................ 17 An In-the-Money “Deductible” ............................................................................................................... 17 At-the-Money: Insurance in Both Directions ......................................................................................... 18 Out-of-the-Money: Insurance Against Missing the Big Move .............................................................. 18 Your Best Call? ......................................................................................................................................... 19 Chapter 4 – Spotlight in Buying ‘Naked” Puts ............................................................................... 20 Varying Bearish Positions ........................................................................................................................ 20 Our Put Buying Picks ............................................................................................................................... 21 Adding Puts to Your Portfolio ................................................................................................................. 22 Chapter 5 - Spotlight on Uncovered or “Naked” Option Writing .................................................. 23 Why Write? ............................................................................................................................................... 23 Capital Requirements ............................................................................................................................... 24 Seeking Writing Opportunities ................................................................................................................ 24 Chapter 6 - Spotlight on Covered Call Writing ............................................................................... 25 In-, At- & Out-of-the-Money ................................................................................................................... 25 Calculating the Percentages ..................................................................................................................... 26 A Word on Dividends and Early Exercise .............................................................................................. 27 Chapter 7 – How Much Should I Invest in Options ....................................................................... 28 Define Objectives ...................................................................................................................................... 28 Using Relative Volatility ........................................................................................................................... 28 Using Diversification ................................................................................................................................ 29 How Much for Call and Put Buying ........................................................................................................ 29 How Much for “Naked” Call and Put Writes ........................................................................................ 29 How Much for Covered Calls .................................................................................................................. 30 How Much for Market-Neutral Hedges .................................................................................................. 30 Testing Different Strategy Mixes ............................................................................................................. 30 Chapter 8 – When to Close Out an Option Position ....................................................................... 31 Follow the Ranks ....................................................................................................................................... 31 Other Considerations ............................................................................................................................... 31 Chapter 9 - Managing a Covered Call Portfolio ............................................................................. 33 Why a Covered Call? ................................................................................................................................ 33 Looking at Your Portfolio ........................................................................................................................ 33 Chapter 10 – Option Trading Tips .................................................................................................. 36 Always Diversify ....................................................................................................................................... 36 Capital Considerations ............................................................................................................................. 36 Trading ...................................................................................................................................................... 38 Chapter 11 - Managing a Market-Neutral Hedge .......................................................................... 39 How the long/short hedge works ............................................................................................................. 39 Which Hedge is Best? ............................................................................................................................... 39 Setting Up Your Hedge ............................................................................................................................. 39 All Four Hedges Combined ...................................................................................................................... 40 Maintaining the Hedge ............................................................................................................................