Page 320

arcane and esoteric as nuclear physics. I had planned not to include a section on combinations but later decided to do so as I figured a passing reference to combinations was necessary. Trading combinations is a complex and time-consuming task, and in my opinion not suitable for many investors. Entering into one option position at a time can be risky enough, let alone entering multiple positions using combinations.

Realizing the risks involved, many brokers would require you to qualify for combinations trading before allowing you to do so. Qualification may involve a demonstrated knowledge of options and combination strategies, together with a minimum amount of cash or equity in your account. My advice: there is no need for an average investor to get involved with combinations even if you qualify. You could lose a lot of money very fast and the risks don't justify the rewards for the non-professional. However, if you feel compelled, start with small amounts in straddles and gradually work your way into spreads. And be prepared to do a lot more studying than just what is in this section alone. And also be prepared to lose a good amount of money before you find a strategy that suits you. Considering the countless variety of straddles and spreads, you will find plenty of material written on this subject, including the usual guaranteed profit strategies which one needs to be very cautious about.

Index Options

At the beginning of the this chapter we mentioned that options can have stocks or futures as their underlying products. We decided to omit the futures options in favor of stock (equity) options, as stock options are more popular and more easily accessible to the average trader than futures options. It is, however, noteworthy to mention that options could also have indices as their underlying products. These are referred to as index options. The underlying products could be indices such as …