<s> ffirs.qxd 12/27/04 3:18 AM Page i
TheOptionsCourse
ffirs.qxd 12/27/04 3:18 AM Page ii
Founded in 1807, John Wiley & Sons is the oldest independent publishingcompany in the United States. With ofﬁces in North America, Europe, Aus-tralia, and Asia, Wiley is globally committed to developing and marketingprint and electronic products and services for our customers’ professionaland personal knowledge and understanding.
The Wiley Trading series features books by traders who have survivedthe  market’s  ever  changing  temperament  and  have  prospered—some  byreinventing  systems,  others  by  getting  back  to  basics.  Whether  a  novicetrader, professional, or somewhere in-between, these books will providethe advice and strategies needed to prosper today and well into the future.For a list of available titles, visit our web site at www.WileyFinance.com.
ffirs.qxd 12/27/04 3:19 AM Page iii
TheOptionsCourse
High Proﬁt & Low StressTrading Methods
Second Edition
GEORGE A. FONTANILLS
John Wiley & Sons, Inc.
ffirs.qxd 12/27/04 3:19 AM Page iv
Copyright © 2005 by George A. Fontanills and Richard Cawood. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmittedin any form or by any means, electronic, mechanical, photocopying, recording, scanning, orotherwise, except as permitted under Section 107 or 108 of the 1976 United States CopyrightAct, without either the prior written permission of the Publisher, or authorization throughpayment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the web atwww.copyright.com. Requests to the Publisher for permission should be addressed to thePermissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used theirbest efforts in preparing this book, they make no representations or warranties with respectto the accuracy or completeness of the contents of this book and speciﬁcally disclaim anyimplied warranties of merchantability or ﬁtness for a particular purpose.  No warranty maybe created or extended by sales representatives or written sales materials.  The advice andstrategies contained herein may not be suitable for your situation.  You should consult witha professional where appropriate.  Neither the publisher nor author shall be liable for anyloss of proﬁt or any other commercial damages, including but not limited to special,incidental, consequential, or other damages.
For general information on our other products and services, or technical support, pleasecontact our Customer Care Department within the United States at 800-762-2974, outsidethe United States at 317-572-3993 or fax 317-572-4002.
Wiley also publishes its books in a variety of electronic formats. Some content that appearsin print may not be available in electronic books.
For more information about Wiley products, visit our web site at www.wiley.com.
Library of Congress Cataloging-in-Publication Data:
Fontanills, George.
The options course : high proﬁt & low stress trading methods / George A. 
p.
Fontanills.—2nd ed.cm.Includes index.ISBN 0-471-66851-6 (cloth)
1. Options (Finance)HG6024.A3F66332.64'53—dc22
2005
I. Title.
Printed in the United States of America.
10
9
8
7
6
5
4
3
2
1
2004028852
ffirs.qxd 12/27/04 3:19 AM Page v
To Charlene Fontanills—the one true love of my life.
ffirs.qxd 12/27/04 3:19 AM Page vi
ftoc.qxd 12/27/04 3:19 AM Page vii
Contents
Preface
Acknowledgments
About the Author
Introduction
CHAPTER 1 Options Trading: A Primer
CHAPTER 2 The Big Picture
CHAPTER 3 Option Basics
CHAPTER 4 Basic Trading Strategies
CHAPTER 5 Introducing Vertical Spreads
CHAPTER 6 Demystifying Delta
CHAPTER 7 The Other Greeks
CHAPTER 8 Straddles, Strangles, and Synthetics
CHAPTER 9 Advanced Delta Neutral Strategies
CHAPTER 10 Trading Techniques for 
Range-Bound Markets
CHAPTER 11 Increasing Your Proﬁts 
with Adjustments
ix
xiii
xv
1
5
16
42
76
130
164
175
187
234
265
311
vii
ftoc.qxd 12/27/04 3:19 AM Page viii
viii
CONTENTS
CHAPTER 12 Choosing the Right Broker
CHAPTER 13 Processing Your Trade
CHAPTER 14 Margin and Risk
CHAPTER 15 A Short Course in Economic Analyses
CHAPTER 16 Mastering the Market
CHAPTER 17 How to Spot Explosive Opportunities
CHAPTER 18 Tools of the Trade
CHAPTER 19 Final Summary
APPENDIX A Trading Resources
APPENDIX B Important Charts and Tables
APPENDIX C Strategy Reviews
APPENDIX D Success Guides
Glossary
Index
330
347
371
382
403
415
453
466
485
503
511
527
533
557
fpref.qxd 12/27/04 3:20 AM Page ix
Preface
An investment in knowledge always pays the bestinterest.
—Benjamin Franklin
Most new investors and traders, whether they are beginners or pro-
fessionals, usually lose money for two reasons. First, they do nothave a grasp of how the markets really work. Second, they are un-der  too  much  stress  when  they  trade  because  they  fear  losing  money.Many  times,  traders  liquidate  good  trades  too  quickly  or  have  no  ideawhen to take proﬁts. But learning to trade successfully is not an impossi-ble task. This book is designed to build your knowledge base of the mar-kets to a professional level and to provide you with strategies that makemoney in the marketplace. My trading program is the result of many yearsof trading experience, as well as many years of research and development,all  in  the  pursuit  of  developing  the  optimal  methodologies  to  trade  thestock, options, and futures markets.
Students  often  ask  me  how  I  got  started  as  a  full-time  investor.  Per-haps  like  you,  I  was  looking  for  an  opportunity  that  would  allow  me  toachieve my ﬁnancial dreams after a long road of despair. After attendinghigh school in Miami, I felt a college career was necessary to become suc-cessful.  Although  I  questioned  what  success  really  meant  to  me  andwhether college would bring me that success, I settled on the University ofFlorida in Gainesville for the wrong reasons. It was close to home and allmy friends were going there.
One day, after just a few semesters, I woke up having difﬁculty breath-ing. I went to the university clinic and was told I had a mild case of pneu-monia.  After  a  week  of  useless  medications,  my  breathing  troublesincreased. Finally X-rays were taken, and at the age of 18, I was diagnosedwith  Hodgkin’s  disease,  a  form  of  cancer.  There  is  no  news  that  can  bemore devastating to a young person and his family.
Perhaps  the  hardest  thing  I  had  to  face  was  the  loss  of  my  physicalprowess. Until that time, I was in exceptional shape, working out every dayand  participating  in  lots  of  sports.  Over  the  next  year,  I  was  hospitalized
ix
fpref.qxd 12/27/04 3:20 AM Page x
x
PREFACE
and  had  to  undergo  chemotherapy  treatments  and  radiation  therapy.Throughout this dark time, I continued my studies at a community college.At this point, I realized that life was too short to waste time, and that Ineeded to work as hard as I could to achieve everything I wanted to do. Asmy resolve to succeed took ﬂight, I coined the phrase, “Out of adversitycomes inspiration.”
I slowly recovered and went on to attend New York University, gradu-ating with honors with a bachelor’s degree in accounting. I subsequentlyearned my CPA license and joined a large accounting ﬁrm. However, afterspending  several  years  in  public  accounting,  I  once  again  felt  disillu-sioned. I needed something more. I applied and, to my surprise, was ac-cepted  at  Harvard  Business  School.  After  two  grueling  years  (butsomething I would do again without hesitation), I graduated.
Here I was, a bright and energetic young man with an MBA from theﬁnest business school in the world with countless job offers others wouldnever  dream  of  turning  down.  But  somehow  I  just  couldn’t  get  excitedabout  any  of  the  positions,  no  matter  what  they  paid  me.  I  had  alreadytraveled down that road and knew that it led to a dead end. Instead, Idecided to go into business for myself.
Driven by my need for a more rewarding career, I started my ﬁrst busi-ness. It failed. Strike one. Undaunted, I started a second business, whichnever  even  got  off  the  ground.  Strike  two.  On  my  third  attempt—an  at-tempt to strike gold in the real estate business—I realized that I could ac-tually  be  good  at  something.  Working  with  some  wealthy  individuals  inMassachusetts, I was just able to keep my head above water. I would ﬁndgreat  real  estate  deals  and  they  would  put  up  the  money  to  buy  them.Subsequently, I would get a small piece of each deal.
Unfortunately,  I  forgot  one  thing:  I  needed  to  eat  and  pay  the  rentwithout the beneﬁt of a consistent salary. Finally, the day came when mylandlord  (one  of  my  partners)  came  to  collect  my  rent  and  I  had  nomoney to pay it. I hedged as best I could and asked him to give me a lit-tle  more  time.  He  turned  me  down,  adding  that  he  was  going  to  throwme  out  regardless  of  how  much  money  I  made  him  in  the  past.  I  wasshocked. At ﬁrst I thought he was kidding around. But with a stern lookon  his  face,  he  proved  me  wrong,  stating  unequivocally,  “One  day  youwill thank me for teaching you this lesson.” At the time, I cockily repliedthat I’d be much happier with a wheelbarrow full of money. In hindsight,I realize that he was probably referring to my favorite personal proverbabout ﬁnding inspiration in adversity. However, he is still waiting for meto thank him.
Crushed and downhearted, I went to my parents to borrow money toeat and live. Being a Harvard MBA and having to borrow money from yourparents is very demoralizing. Having to listen to “Why don’t you get a real
fpref.qxd 12/27/04 3:20 AM Page xi
Preface
xi
job?” not only from them but from others made me decide to give corpo-rate life another shot.
Soon after, I found a consulting job that lasted a whole 30 days. It wassupposed to be a permanent job. But as I was being ﬁred, I was told I hadthe wrong attitude. In fact, they said much more than that, but most of itcould  never  be  printed.  Unfortunately,  they  were  right.  I  did  have  thewrong  attitude.  I  just  didn’t  want  to  work  for  anyone  but  myself.  I  re-turned to real estate and started looking for new projects, but this time Iwas determined to control them. In this roundabout way, I was ﬁrst intro-duced to the concept of an option. A real estate option allowed me to con-trol a piece of property with very little cash for a speciﬁc period of time.As I later learned, stock and futures options are very similar.
My ﬁrst deal was exciting. I found a great apartment complex goinginto  foreclosure  and  convinced  the  owner  I  could  buy  the  property.  Infact,  I  had  no  cash  at  all.  Even  worse,  my  credit  was  destroyed  and  myshiny BMW had been repossessed. Since I was approximately $50,000 indebt, I did what I had to do: I convinced an investor to put up the optionmoney  and  split  the  proﬁts  after  the  property  was  sold.  I  made  a  nice$35,000 proﬁt on that deal—ﬁnally, a success.
After a series of proﬁtable deals, the bottom fell out of the real estatemarket. There was no money available anywhere. Once again, I was leftwith a big question mark as to what I should be doing with my life. Luck-ily,  serendipity  intervened.  One  day,  I  received  a  small  advertisement  inthe mail for a book on futures trading. Although I had no clue as to whatfutures  trading  was  all  about,  I  ordered  the  book.  What  struck  me  mostwere tales about making large amounts of money in a short period of timeusing very little cash. This sounded very similar to what I had been doingwith real estate.
Why had I never learned any of this when I attended Harvard BusinessSchool? How could the great “boot camp of capitalism” neglect to teachme about futures markets? My interest was now piqued. I picked up a fewmore books. I began to watch the markets. I even played with a few intro-ductory  strategies;  but  although  I  found  them  interesting,  they  were  notvery proﬁtable. My ﬁrst big mistake was to convince my investment part-ners that we should begin trading by hiring experienced professionals. Inless  than  30  days,  these  so-called  professionals  lost  about  30  percent  ofour capital. This was an extremely poor way to inspire conﬁdence in myinvestors. I decided to ﬁre everyone and learn to do it myself. I knew that Icould  lose  at  least  30  percent  without  even  trying  (even  more  if  I  reallytried). I was determined to make a proﬁt, and the trick was to get a com-petitive  edge.  That  much  I  did  learn  at  Harvard.  To  be  successful,  youneed to have an edge.
I began to analyze where I could ﬁnd this edge, focusing my attention
fpref.qxd 12/27/04 3:20 AM Page xii
xii
PREFACE
on  using  computers  to  garner  information  faster  than  others  did.  I  gained experience  as  a  trader,  even  learning  how  to  write  my  own  computerprograms.  Eventually,  this  long  and  eventful  journey  gave  birth  toOptionetics. Today, I teach this system to individuals all over the world.Hopefully, this book will enable you to develop a better understandingof the markets and will assist you in learning how to proﬁtably trade. Inmy opinion, there is no better lifestyle than that of a successful trader.
GEORGE A. FONTANILLSMiami Beach, FloridaDecember 2004
flast.qxd 12/27/04 3:21 AM Page xiii
Acknowledgments
Iattribute  my  success  as  a  teacher,  trader,  and  businessman  to  the 
incredible support I receive each and every day from my friends, family,and  colleagues.  I  am  fortunate  to  be  able  to  do  the  job  I  enjoy  withsome  of  the  most  extraordinary  people  in  the  business.  I  would  like  tothank everyone at Optionetics who has helped to build our company intoa global one. Your hard work and team spirit allow me to do what I loveto do: trade options. Without you, this book would not be possible. You areall simply the best. In particular, and in no order of importance, I wouldlike to especially thank the following people:
Tom Gentile is the Chief Trader for Optionetics. I would like to thankhim for contributing a lot of great material for the second edition of thisbook. We work so closely together as a trading group that I often cannotdistinguish my original ideas from Tom’s. Simply stated, Tom is a tradinggenius, and his nickname “the option guru” is well deserved.
Richard Cawood is the CEO of the Global Group and Optionetics andthe  mastermind  who  perhaps  maintains  the  lowest  public  proﬁle  of  ourgroup while having the highest inﬂuence. I am very fortunate to have hisbusiness  acumen  leading  our  team.  The  success  of  our  full-time  tradingendeavors is made possible only because Richard manages our business.And with that I have to acknowledge his right hand, Tony Clemendor, anold friend and groundbreaking COO. My partners—Tom Gentile, RichardCawood,  and  Tony  Clemendor—are  the  backbone  of  the  company  anddeserve the bulk of the credit in building our company.
In  addition,  I  wish  to  recognize  Amy  Morris,  who  has  been  with  ussince  we  started.  Without  her  dedication  and  inspirational  managementskills, my life would be much more difﬁcult. And of course, I send waves ofgratitude  to  Kym  Trippsmith,  my  Editor-in-Chief.  Her  resourcefulness,hard work, and determination are the reasons this book—as well as all theothers—exist. Thank you, Kym!
My thanks also go to my trading family, writers, and friends. In partic-ular,  Frederic  Ruffy  and  Jody  Osborne  are  two  of  the  most  outstandingwriters I have ever had the pleasure of working with. Their timely revisions
xiii
flast.qxd 12/27/04 3:21 AM Page xiv
xiv
ACKNOWLEDGMENTS
to this edition of The Options Course were invaluable. Finally, I want to thankKim Diehl, the Associate Editor, for her eagle eyes and editing acumen. Thereare many others and I hope they forgive me for not being able to list everyone.My  loving  family  has  supported  me  in  all  my  adventures  over  theyears. I thank them for always believing in me even when I didn’t believein myself. When my battle with cancer occurred, they were always at myside and their prayers were answered with my recovery. I thank God formy second lease on life.
People  continually  ask  me  why  I  publish  material.  For  the  record,  Ienjoy passing on my knowledge to others. However, without my team sup-porting me, I would probably stick to trading full-time for a living. Thanksto  the  help  of  my  incredible  support  team,  I  am  able  to  do  both  of  thethings that I love: trade and teach.
Finally,  I  would  like  to  thank  my  students,  who  inspire  me  to  keepwriting and publishing. Over the years, we have made numerous friendsand received many great ideas from our students that have enhanced ourown trading. I look forward to meeting you someday at one of my manyspeaking  engagements  or  at  an  Optionetics  seminar  coming  to  a  townnear you. Until then, good luck and great trading.
G. A. F.
flast.qxd 12/27/04 3:21 AM Page xv
About the Author
Having struggled to overcome a life-
threatening  illness  as  a  youngman,  George  Fontanills  is  a  truebeliever  in  the  idea  that  pursuing  yourdreams  is  something  that  should  neverbe  put  off  until  tomorrow.  Like  manypeople, George followed the typical edu-cational  and  work-related  path:  Fromhigh school he went to college, and fromcollege to an accounting job at the presti-gious  ﬁrm  of  Deloitte,  Haskins  Sells.Upon  receiving  his  CPA  license,  Georgestarted  work  with  Andersen  Consulting.Not quite satisﬁed with where his life washeaded, he left this job to attend HarvardBusiness School’s MBA program.
After receiving his MBA, George decided to get off the treadmill of un-satisfying jobs. In the face of several high-paying job opportunities, Georgedecided that he needed to start his own business. His ﬁrst business failed.Undaunted, he started a second business that never left the starting gate. Asurvivor, he kept going. Running low on money, George became a real es-tate investor buying property with no money down. Finding a business heenjoyed, he quickly began to build a successful track record and increasehis net worth. Just as he began to feel that he had found his lifelong career,the bottom fell out of the real estate market—strike three.
As George pondered his next move, he received a brochure on makingmoney in the markets. After ordering the book, he began trading . . . and los-ing money. Rather than concentrating on his own losses, he began studyingsuccessful traders to see what they were doing differently. Using the analy-sis skills he developed at Harvard, George conducted a comprehensive in-vestigation  to  determine  what  differentiated  the  winners  from  the  losers.Risking  the  money  he  made  in  real  estate,  George  tested  his  conclusions,eventually developing a unique approach to trading that involved  utilizing
xv
flast.qxd 12/27/04 3:21 AM Page xvi
xvi
ABOUT THE AUTHOR
managed risk strategies to strategically attack any market. By mathemati-cally controlling risk every time a trade is placed, consistent proﬁts can bemade without the stress of unbridled losses. Fontanills called this tradingstyle “Optionetics.” As his net worth soared, he gained a reputation as anexpert in nondirectional, managed-risk trading and has become a well-respected teacher and speaker at trading conferences all over the world.Today, Optionetics offers several of the best-attended trading courses inthe  world.  George’s  straightforward  and  insightful  approach  to  tradinghas  enabled  thousands  of  people  to  learn  how  to  limit  their  risks  andmaximize their trading successes.
These  days,  Fontanills  is  President  Emeritus  of  Global  InvestmentResearch Corp. and an active options and stock trader. George’s reputa-tion  as  “the  dean  of  options  trading”  has  led  to  numerous  guest  appear-ances on television and radio shows across the country. Most recently, hehas been quoted in The Wall Street Journal, Barron’s, Research magazine,CBS  MarketWatch,  and  TheStreet.com.  He  also  appears  on  CNBC,Bloomberg,  and  CNNfn,  as  well  as  numerous  radio  stations  across  thecountry.  In  addition,  George  Fontanills  has  written  two  best-sellers, TheOptions Course and Trade Options Online, and co-written with his part-ner, Tom Gentile, two others: The Stock Market Course and The VolatilityCourse.  These  “deﬁnitive  guides  to  trading”  have  added  to  his  criticalacclaim as one of the best trading instructors in the world.
ccc_fontanills_intro_1-4.qxd 12/17/04 3:52 PM Page 1
Introduction
Options are one of the most proﬁtable tools available to traders to-
day.  They  offer  traders  the  ability  to  leverage  positions,  managerisk,  and  enhance  returns  on  existing  portfolios.  To  those  whochoose  to  trade  options,  this  book  provides  the  practical  knowledge—from basic concepts to sophisticated techniques—necessary for success-ful  options  trading.  It  is  designed  to  provide  novice  and  intermediatetraders with methods and strategies that will enhance proﬁts and managerisk more effectively.
The  investment  world  has  gone  through  amazing  gyrations  since  theﬁrst  edition  of  The  Options  Course was  released  back  in  1998.  We  havelived through the boom of the Internet along with the subsequent bust—when  the  dot-com  became  the  dot-bomb.  During  this  period,  fortuneswere made and lost virtually overnight. Traders who made money so fastthey  didn’t  know  what  to  do  with  it  turned  around  and  lost  it  so  fast  itmade their heads spin. It is always painful to see how fast investors canlose  money—especially  when  techniques  to  limit  risk  could  easily  havebeen employed.
In  addition  to  this  wild  time  in  early  2000,  we  saw  a  precipitous  de-cline in the technology sector as well as in many blue-chip stocks. In theyears following the collapse of the Internet bubble, almost everyone lostmoney.  Even  people  with  mutual  funds  saw  tremendous  drops  in  theirmonthly  statements.  Meanwhile,  many  small  as  well  as  institutional  in-vestors  kept  betting  that  the  market  would  rebound,  only  to  see  it  fallagain  and  again.  This  continual  drain  destroyed  the  conﬁdence  of  manystock market players.
Conversely,  bond  investors  saw  their  yields  rise  dramatically  as  theFederal Reserve had to keep dropping interest rates. Apparently, the eco-nomic  slowdown  would  not  halt  unless  dramatic  reductions  in  interestrates could spur economic recovery. It was a slow process and the Ameri-can economy continues to slowly recover.
World events have also changed our lives dramatically. September 11,2001, was one of the most horriﬁc and unforgettable events in the historyof  humankind.  Unfortunately,  too  many  mothers,  daughters,  fathers,  and
1
ccc_fontanills_intro_1-4.qxd 12/17/04 3:52 PM Page 2
2
INTRODUCTION
sons as well as all the heroes of 9/11 will be remembered in history due tothe horrible deeds of a few. As someone who was in New York and sawthis event ﬁrsthand, I will never forget this day for the rest of my life. Thisevent—along with surviving Hodgkin’s disease when I was only 18—hasled me to understand the importance of living life to its fullest every day.Undoubtedly it has woken us all up; we are now more fully aware of theglobal scope of the world we live in and the importance of appreciatingthe gift of life on this amazing planet.
As  options  traders,  we  have  to  focus  on  the  many  events  that  canmake markets move in any one of three directions: up, down, or sideways.One of the most vital factors that must become part of your daily marketapproach  is  to  pay  close  attention  to  volatility.  How  fast  can  an  eventdrive  the  markets,  and  how  can  we  take  advantage  of  this  event?  Whatstrategies can be employed when historical and implied volatility diverge?Options  provide  the  knowledgeable  investor  or  trader  opportunities  tocreate scenarios that others may not see. A stock investor can only buy orsell  a  stock,  whereas  an  options  trader  can  have  a  number  of  differentstrategies  for  different  time  frames.  I  like  to  say  that  we  are  playing  achess game with the markets. The market makes a move; I counter thatmove until, hopefully, I “checkmate” the market.
During the past 10 years of teaching individuals how to make moneyin the markets, I have had the opportunity to meet thousands of people,and they each seek ways to improve their lives—both for themselves andfor their families. I hope that your own personal success will enable youto  help  your  loved  ones.  Just  remember  that  life  is  short  and  there  aremany roads it may take; but if we do our best to be good to others, thenany path we take should also reward us many times over.
I certainly hope this book will help you to change your life in a posi-tive way. The powerful strategies reviewed in it offer traders the ability toconsistently make good returns when these trading approaches are solidlyunderstood and strategically applied. Although at times it may seem likean insurmountable task to comprehend all aspects of options, I promisethat  it  is  well  worth  the  effort.  Just  think  back  at  how  much  time  andmoney you spent in getting to where you are today. A little more consis-tent time and effort can reward you many times over.
The ﬁrst question you need to ask yourself is: Why do you want totrade? The most common answer is to make more money. While tradingcan provide a great living, it’s important to make sure you love what youdo—no matter what it is. This will lead you to become more successfulin the ﬁeld of your choice. Once you have asked yourself why you wantto trade, then ask yourself why you want to trade options. Most individu-als want to trade options because these incredibly ﬂexible instrumentsenable traders to control an asset for less money. For example, let’s say I
ccc_fontanills_intro_