Options books

[Cardboard]

I have been using options for a long time, but never learned much about how they are priced, the Greeks and more complex strategies such as straddles, condors and the like.

 

There are two books that I am looking at: Options for the Stock Investor and Trade Options like a Professional. They are both from James Bittman and I like the fact that they come with a software to plot your P/L and it gives you the greeks values.

 

Which one do you recommend? Any better recommendation?

 

Thanks

Cardboard   

[ExpectedValue]

Options by Natenberg

[jjlin]

It's been a while but I believe McMillan's book "Options as a Strategic Investment" is one of the standard tomes:

http://www.amazon.com/Options-Strategic-Investment-Lawrence-McMillan/dp/0735201978/ref=sr_1_1?ie=UTF8&s=books&qid=1248539705&sr=8-1

 

Also a fantastic (and free) tool is provided by thinkorswim.com (they recently got acquired by Ameritrade I believe). The software is fantastic (and free) and I believe they have classes and you can do a "paper trade" account to do practice runs on real data. http://www.thinkorswim.com/

[bargainman]

I'll second the thinkorswim recommendation.  Check out their chat archives.  They have great sessions by folks who have been market makers for years so they talk a lot about risks that aren't obvious at first glance.

[link01]

i'll second options by natenburg. another excellent one is fundamantals of the options market by michael williams & amy hoffman.

 

i used to trade options back in the day, hoping i could unlock their secrets. i could never find a way to make enough to pay for the hrs upon hrs spent concocting strategies both simple & complex, screening for ideal setups, monitoring position gamma, delta, theta, implied volatility, etc. and if i could console myself that at least i was enjoying the challenge, that quickly evaporated come tax preparation time at yrs end! what a headache!!

 

i did come across 2 instructional instances at 2 different options websites where both utilize the same strategy of selling iron condors on equity indexes but with different spins if similar results. you might find it interesting:

 

https://www.thinkorswim.com/tos/displayBlog.tos

 

and

 

http://www.condoroptions.com/index.php/performance/

 

 

[bargainman]

i used to trade options back in the day, hoping i could unlock their secrets. i could never find a way to make enough to pay for the hrs upon hrs spent concocting strategies both simple & complex, screening for ideal setups, monitoring position gamma, delta, theta, implied volatility, etc. and if i could console myself that at least i was enjoying the challenge, that quickly evaporated come tax preparation time at yrs end! what a headache!!

 

Link, I think there's really little point in trying to 'unlock their secrets' per se.  The options markets are traded by market makers who have been at it for years and years, so I don't think there are many inefficiencies to be exploited in the options themselves. Where I think there are inefficiencies is in the fundamental analysis of the underlying stock, and you can use option set ups to take advantage of those.  Options themselves don't really present much in the way of arbitrage capabilities as far as I can tell, since otherwise the market makers would be the first to take advantage.  There are so many market makers out there trying to get an edge that if you try to play their game you will lose.  They have way lower costs both in commissions and in use of margin.  I think the best way to win the game is to pay more attention to the long term and the fundamentals where I think market makers tend to pay less attention..  That said knowing a lot about combos I think is helpful in terms of knowing what sorts of options you have when a trade goes bad etc...   It's definitely an interesting intellectual exercise when greeks are involved :-)

[link01]

Link, I think there's really little point in trying to 'unlock their secrets' per se.  The options markets are traded by market makers who have been at it for years and years, so I don't think there are many inefficiencies to be exploited in the options themselves.

 

well, i certainly had no gift for unlocking any worthwhile $-making secrets. better luck to you, tho.

 

and i hear what you're saying re the market makers & inefficiencies. tho i'm more than a little hazy on my option theory nowadays i seem to remember that puts & calls on the underlying rarely get too far out of whack with each other because of the inherent risk free conversion arbitrage opportunity to be had if they did. for instance buying calls at strike x & selling the same no. of overpriced  puts of the same strike & month to create a synthetic long stock position. because of the overpriced puts relative to the same stike calls you're essentially buying that synthetic long stock position at a discount to the market price of the stock existing at the same moment in time, which you could then 'lock in' by simultaneously shorting an equal amount of that stock & waiting for expiration to realize the spread on your synthetic. but thats all much easier to do in theory than in practice. and its the supercomputers that would get there first to claim the spoils in any case.

[Cardboard]

Thanks for the help guys! On Natenberg, I did not find on Amazon:"Options" by Natenberg, but I did find: "Option Volatility & Pricing" by Natenberg. Is this the one?

 

I probably should have given more information as to what I am looking for.

 

I am not interested to trade options or to find arbitrage between them. What I am looking for is information on how to pick my options better and what to do once I have entered the position.

 

The first point is about pricing and volatility. Options go up and down in price sometimes even if the underlying stays flat and decay has not changed much. I suppose that this is based on supply/demand for this option and specific stock/index volatility, but I would like to comprehend more on how market makers adjust the price for that. It could help me to reduce the premium I pay.

 

The second point is about optimizing my trade once I have purchased the option (mostly calls). For example, I own FFH Jan 2010 strike $200 calls. When I bought them, it seemed that the duration and premium was reasonable vs the underlying. The calls have moved up nicely in price, but what to do now if I believe that the underlying has more to go? Stay put until the underlying goes to where I believe, replace with a higher strike call, hedge? So, I am looking for ideas or strategies to optimize my capital and to reduce risk.

 

Cardboard

[ExpectedValue]

Yeah, that's the book Cardboard.

[Packer16]

A useful framework I have found (not found in many books) is to perform scenario analysis.  For example, what would my option or alternatives be worth if the underlying was at $x.  Since you have some insight into the common this should be a useful extention.  One caution is that determining the timing of when a stock price is going to be where is much more difficult than it originally appears and focusing on underlying you really understand is very important.  Another useful tool (for in the money options) is to calculate the implied borrowing cost in the option by substracting the stock price from the option price plus the strike price and dividing by the strike price.  This also can be compared to margin rates to determine the cost of downside insurance.

 

Packer

[username]

Hull's "Options, futures, and other derivatives".

[arbitragr]

"There's no limit to what a man can do or where he can go if he doesn't mind who gets the credit"

 

I bet CIT group cares about who gets credit.