The Option Trader Handbook : Strategies and Trade Adjustments

Rating:
Summary: Not groundbreaking, but very good nonetheless...
Review: The Option Trader's handbook is a bit more in-depth than most basic option trading texts in that it explains what to do to after you have entered a position. Unlike trading a stock or future, with options, there are many possibilities. Other books too often neglect the adjustment part of a trade.

Most option books describe various spreading strategies, but I know many novice traders complain about picking a directional spread (bull call or bear put), getting the direction correct, only to lose money because the spread still hasn't reached its maximal potential because of time value still remaining. This book tells you what to do in order to keep much of the profits without increasing risk.

Many of the tactics and adjustments described were alluded to in McMillian's _Options as a Strategic Investment._ But that thick tome occasionally left out a few points complete novices might not pick up. So if you trade stock, long options, or spreads, and want to figure out what to do to limit risk, this will explain things clear and simple language.

The author clearly demonstrates the beauty of trading options in addition to the underlying security. There are so many ways to repair a losing position, minimize, or eliminate the risk of loss, I am amazed that options have the risky reputation they do.

The one danger with all of these adjustments, however, is that you spend too much time on a trade trying to come out with a small profit, or break even. From a psychological POV, this knowledge could be dangerous in that you fail to admit a trade hasn't worked. Rather than take the loss, you make adjustments, and focus your energy on breaking even, rather than looking for a trade to make you whole, and then some.

One of the negatives--I was hoping the authors would go into more detail on various delta neutral trade adjustments. There was much discussion on adjusting long or short positions, but not much at all on diagonal spreads, or various types of ratio spreads.

Another issue--there is some advice that strikes me as mistaken.
The author advises selling an in-the-money call option on a stock you own to hedge against a decline while avoiding short term capital gains (p. 89). My understanding is that the IRS considers this a "constructive sale" and either you are taxed (if you get assigned) or your holding period starts over.

But aside from this, the book deserves a place on the shelf of every trader.

Rating:
Summary: Solid book
Review: You should probably have a bit of experience before reading this book. It is not an absolute beginner's book. However the concepts are presented clearly and there are enough of them so it is likely there will be something interesting for most everyone.

You will need a level of mathematical sophistication necessary to multiply by two or three as well as addition and subtraction. This book contains no mathematical concepts beyond that level.

If you are looking for theory, keep looking as you won't find much of that here. Practicality is the hallmark of the book.

There have been thousands of books written on investments and options over the years. It would be quite hard to come up with much that is truly original. Instead the better books come at things from a different perspective. This book is certainly better than most on the subject. Here are some of the things that make this book different than most.

There is no super secret no risk sure fire rags to riches in 30 days plan presented. Instead there is an emphasis on trading should be looked at for what it is; a business. A healthy respect for risk is shown throughout the pages. The first chapter of the book is worth almost anyone's time as most people do not seem to realize they are in business when they call their broker or click on their order page.

Many options books present large numbers of P/L graphs on the various possible positions. This book is no exception, however they approach things from a slightly different perspective. Here much of the emphasis is on how to move from one position to another. They extensively cover many different changes you would want to consider making as the market or your perception of it changes.

Knowing the relationships between different postions is important for several reasons. First you can react quickly by having a good idea as to what to do in a rapidly changing enviroment where a few seconds delay can cost a lot of money. An even better use for this information is in forming your trading plan before you ever place an order. A third use is to avoid situations where there are no good adjustments if things do not go as planned.

The first negative that I found had to do with the length. In general having any 2 of the three building blocks (puts, calls, underlying) you can synthetically construct the other piece (indeed a large part of the book is devoted to this concept). The authors built a little more repetition into the book than I personally found necessary by doing the same analysis on mirror image postions. This is not a major downside as some will appreciate the review and others will simply skip a few pages here and there.

The second issue concerns the use of the terms free trade or risk free trade. The reality is the trade was not free and there is a price. The price may have been actual money, foregone opportunities, or increased risk. Sometimes the authors mention the cost, other times they do not.

An example of a not so free "free trade" would be to buy a call have the stock rise, sell a higher priced call for what you paid for the original. You now have a bull spread. This is free in the sense you now have a spread position at no cost. However it could end up costing you if the stock drops because the spread could become worthless and you could have sold your long call outright. The concept is good but I find the wording to be troublesome.

Overall I believe the money spent on this book was a pittance compared to the money made or saved by reading this book and I am very glad to have bought it.