Option Writing Strategies for Extraordinary Returns [Hardcover]

David Funk (Author)

Book Description

Publication Date: April 14, 2005

Option Writing Strategies for Extraordinary Returns details put and call writing techniques sophisticated investors can use to profit from market movement in any direction. It first outlines a strategy for selling options short, using tables and charts to illustrate each step, and then builds a three-legged model for using popular options tools when purchasing stocks. Additional features include techniques for extending a position or writing “up” a position, a valuable listing of available online option tools, and steps for taking advantage of market volatility.

Editorial Reviews

Review

"Clear, concise, and easy to read...an excellent job of making strategies involving short options accessible to everyone." -- James B. Bittman, Senior Instructor, CBOE Options Institute, and author of Options for the Stock Investor

"Superbly written...irresistibly clever ways to cope with the market’s stubborn refusal to publish an itinerary of the future." -- Don Worden, Worden Brothers, Inc., publishers of TeleChart, www.worden.com

"These savvy investors likely outperform 98% of all investors over the years." -- Yale Hirsch, Founder, The Stock Trader’s Almanac

"This book presents sophisticated investment strategies in simple and clear language, enabling investors to improve their returns and reduce risks." -- Pedro Belli, Economist, formerly with the World Bank

"This method works exceptionally well no matter which way the market swings...an excellent way to establish an investment portfolio." -- Brooks Harrison, Former Chief Technical Analyst, John Magee, Inc.

From the Back Cover

Straightforward stock market strategies that offer exceptional returns and cash flow while substantially reducing market risk

With only minimal extra effort each month, you can do better--a lot better--than buy-and-hold. To earn solid returns while effectively managing risk, millions of investors in whipsaw financial markets have learned that basic option writing strategies can make a dramatic improvement in their investment returns.

Option Writing Strategies for Extraordinary Returns details put and call writing techniques that investors from conservative to aggressive are using to both generate and protect portfolio profits in bull, bear, and non-trending markets. Whether your goal is to create better-than-average long-term growth or generate better-than-average current income, this timely book provides step-by-step directions you can follow to create a stock option strategy that allows you to:

• Combine the purchase of blue chip stock with the writing of puts and calls on that stock
• Increase your long position in the future, if the put is exercised, at a fixed price that is guaranteed to be lower than the current price
• Generate significant interest on cash received when you write options

It’s not as complex as it sounds; it is, however, proven effective at reducing the risk of owning common stocks. Option Writing Strategies for Extraordinary Returns will change the way you look at stock ownership and option writing by combining the two into an effective, all-weather investing program.

For too long, individual investors have been inundated with stories on the perils of option buying. Brokers and money managers who passed along these scare stories could hardly be blamed, since more often than not they had never taken the time to understand the profitable merits of writing options.

Option Writing Strategies for Extraordinary Returns explains, in everyday language and without complex mathematics, how you can use option writing strategies to improve your investment returns while shielding your portfolio from unexpected loss. It explodes the prevailing myth that writing options exposes an investor to unpredictable and unlimited risk by detailing how, when used correctly, option writing is in fact among the most easy-to-use methodologies for shielding your portfolio from such risk.

Using tables and charts to illustrate each step, veteran options expert David Funk details an innovative “three-legged” model that involves the purchase of a stock position and the simultaneous writing of both put and call options with different strike prices on that position. This model reduces the amount of downside risk assumed versus buying stock alone, while allowing you the flexibility to increase your upside potential when you feel circumstances warrant.

This well-organized guidebook takes you through an innovative program designed to turn basic put and call option writing into powerful income and capital building tools:

• Section 1 covers the basic concepts of covered call and cash-collateralized put writing
• Section 2 explains how to design an investment program focused on capital appreciation
• Section 3 shows how to adjust that program to maximize current income
• Section 4 explores advanced strategies for extending positions, profiting from unusual events, and more
• Section 5 shows you how to prepare for, and even profit from, early assignments and other unexpected occurrences
• Section 6 takes a more in-depth look at the underlying theory of option writing

Option Writing Strategies for Extraordinary Returns isn’t a get-rich-quick book that promises to double your money each year. What David Funk’s book does promise is to introduce you to a commonsense, market-proven investing strategy for making more money than the majority of investors, while providing your portfolio with specific loss limits when the market drops.

"These savvy investors likely outperform 98% of all investors over the years."-Yale Hirsch, Founder, The Stock Trader's Almanac

"Superbly written...irresistibly clever ways to cope with the market's stubborn refusal to publish an itinerary of the future."-Don Worden, Worden Brothers, Inc., publishers of TeleChart, www.worden.com

"Clear, concise, and easy to read...an excellent job of making strategies involving short options accessible to everyone."-James B. Bittman, Senior Instructor, CBOE Options Institute, and author of Options for the Stock Investor

"This method works exceptionally well no matter which way the market swings...an excellent way to establish an investment portfolio."-Brooks Harrison, Former Chief Technical Analyst, John Magee, Inc.

"This book presents sophisticated investment strategies in simple and clear language, enabling investors to improve their returns and reduce risks."-Pedro Belli, Economist, formerly with the World Bank

See all Editorial Reviews

Product Details

• Hardcover: 256 pages
• Publisher: McGraw-Hill; 1 edition (April 14, 2005)
• Language: English
• ISBN-10: 0071448837
• ISBN-13: 978-0071448833
• Product Dimensions: 9 x 6.1 x 1.1 inches
• Shipping Weight: 1.3 pounds (View shipping rates and policies)
• Average Customer Review: 3.3 out of 5 stars  See all reviews (9 customer reviews)
• Amazon Best Sellers Rank: #290,784 in Books (See Top 100 in Books)

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Customer Reviews

Most Helpful Customer Reviews

97 of 99 people found the following review helpful:

1.0 out of 5 stars This book is a serious DANGER to your financial health, February 11, 2006

By 

J. D. Rachmat (Jakarta, Indonesia) - See all my reviews
(REAL NAME)   

This review is from: Option Writing Strategies for Extraordinary Returns (Hardcover)

I am an option trader with 3 years of trading experience, and I am thoroughly alarmed after reading this book.

Here are my criticisms:

1. Lack of Clarity
Two problems here: name, and explanation of the strategy. Mr Funk insists to call his recommended strategy "the three-legged position". OK, everyone is entitled to create their own pet names, but it would have been useful to tell the reader what the rest of the market calls this strategy - it is "Covered Strangle Writing" or "Covered Short Strangle".

More serious than Mr Funk's refusal to come clean about the name of his recommended strategy, is his failure to explain the WHYs of this strategy. Now the common use of Covered Short Strangle is to generate income, and this is discussed at some length in the book. However, there is no discussion about the relative merits of this strategy compared to other income-generating option strategies, such as Covered Call.

More dishearteningly, Mr Funk creates a twist in the standard Covered Short Strangle to devise a capital-appreciation strategy. Would a traditionally income-generating strategy be effective as a capital-appreciation strategy ? How does it compare to other capital-appreciation option strategies ? No discussion. Why does he recommend the sale of deep-in-the-money put options ? No explanation.

In short, we get good clear details of the mechanics of his recommended strategy, but zero explanation as to WHY he recommends each part of this strategy.

2. Fuzzy discussion of RISKS
No where in this book can we find a risk chart that shows clearly at what price ranges will this strategy make or lose money, and by how much. You need to read the book very carefully to deduce (yes, deduce - because Mr Funk does not spell it out clearly) that it will make money when the stock price moves strongly upwards.

Furthermore, Mr Funk only glancingly discuss risk management. What to do if the stock price moves down instead .. ? Well, don't forget to set your stop-loss at 20%. That is it. There isn't even any explanation whether the stop loss should be applied to all three positions (the stock, the short put and the short call options), or just the stock.

So, the blurb in the front cover "Benefit from both up and down markets" is misleading. This strategy will hurt on the way down, and for the capital-appreciation variation (with deep in the money short put) it will hurt when the stock price is moving sideway too!!

3. Zero discussion on the strategy's disadvantages
Reading through this book, you will think that this strategy has no weakness at all. Let's refer to what other leading option experts have to say about it:

"Very high risk and capped reward. Not recommended." (Guy Cohen, "The Bible of Options Strategies", 2005, p. 305) He goes on to say that while this strategy generates better yield compared to Covered Call, it is also substantially riskier, "the position can become loss-making at approximately double the speed as a simple Covered Call position" (p. 52).

"So a covered strangle - which is a covered write and a naked put - is equivalent to selling two naked puts. Therefore, it would be more efficient to just sell two naked puts rather than bother with the covered strangle write." (Lawrence G. McMillan, "McMillan on Options", 2004, pp 76-77) He goes on to say that simply selling two naked puts will bring lower collateral requirements, lower commision costs and avoid having to deal with three bid-asked spreads.

Every option strategy has a weakness; so this book's silence on this very important subject makes it a serious DANGER to your financial health.

46 of 47 people found the following review helpful:

1.0 out of 5 stars misleading, uninformative, and repetitive, September 6, 2005

By 

Incunabulum (Skokie, IL) - See all my reviews

This review is from: Option Writing Strategies for Extraordinary Returns (Hardcover)

This book suggests what the author calls a "three-legged" approach; buying the stock, writing a covered call, and writing a cash collateralized put, where the options written are LEAPS. There are several problems in how he presents this idea:

He doesn't show the payoff charts which are normally used to show potential returns as a function of price at expiration. Instead, for the few cases where he calculates the possible return, he calculates it assuming a zero price change, which corresponds to a single point on a payoff chart.

He doesn't explain why he thinks this "three-legged" approach is better than just a covered call. In fact if the payoff charts are plotted for some of his examples (p. 120, GM), it is clear that a covered call would have given better returns than his approach regardless of the price at expiration.

He repeatedly states that the "three-legged" approach "benifits, within a range, from stock price movements in either direction". This implies that returns increase as long as the stock price changes from where you bought it, which is not true. Again, showing the payoff charts would have made this clear.

This book is not a good use of your time or money. If you'd like an introduction to writing options, I'd suggest Wolfinger's "The Short Book on Options". If you are interested in a more aggressive strategy, I'd suggest Lehman and McMillan's "New Insights on Covered Call Writing".

40 of 43 people found the following review helpful:

5.0 out of 5 stars Writing Options for a Third Source of Income, March 29, 2006

By 

Brian G. (New York) - See all my reviews

This review is from: Option Writing Strategies for Extraordinary Returns (Hardcover)

I am an investor with 10 years of experience with writing options. I am very pleased with the conservative approach presented in this book.

Of course there are other capital appreciation strategies and other income-generating strategies, but this book's strategy of the three-legged position (buy the stock, write the cash-collateralized put, and write the covered call) provides an excellent balance between risk and reward.

The author stresses the importance of fully collateralizing the put, with either cash or near-cash investments such as tax-qualified preferred stock. Naked puts are never recommended. Writing covered calls and cash-collateralized puts are the key to safer long-term investing.

The relevant comparison for me is how the three-legged strategy with fully collateralized puts and 100% covered calls (all LEAPS) compares with the standard investment strategy of either buying to hold a stock, or attempting to "time the market" by buying, selling, or selling short a given stock. I am convinced, through my experience with the three-legged strategy, that it is the best approach.

The fact that an extremely large number of options expire worthless (about 85% of them) provides fertile field for the investment strategy of writing options for a third source of income. I can reap the rewards from the option expiration when it occurs, or, prior to expiration, I can re-write the option at a different strike price or different expiration date, or simply buy it back.

I strongly recommend this book for long-term investors seeking additional investment tools with an acceptable risk level.