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Not Nearly As Intimidating As Most Books On The Subject
on April 18, 2013
First off, this book is very light on the Greek. In fact, equations don't appear until the end of the book. It's also very well-paced, quite read-able, and states upfront which parts are for beginners and which parts are for the more experienced.
The first section, consisting of nine chapters, provides the novice with just enough information to get in over her head. The second section, consisting of sixteen chapters, provides the reader with terse basics on some of the more popular options strategies. The third section, titled Special Topics, provides the more advanced readers with fairly complex strategies involving a bit of math; it is here where the equations (and rocket science) finally appear.
The book has two notable weaknesses. For one, it should have invoked the forces analogy. Generally speaking, over the life of an option, there are two main forces, the time force and the price force. The time force works to reduce the value of the option, regardless of the type of option (put or call) or option strategy (naked or covered, single or multiple) selected. Once an option expires, it is worthless, so over the life of the option, the time force moves the value towards zero. The price force can work in one of two ways. It can increase the value of the option, or it can further exacerbate the effect of the time force. The latter, in addition to a lack of graphs, charts and schematics in the first section of the book, really undermined the book- especially in Chapter Four when it introduced The Greeks (delta, gamma, vega and rho)- the mathematical symbols that characterize the way that options behave.
Perhaps the most notable weakness of the book is the lack of specifics on the cost of running an options program (generally speaking, incorporating options can potentially be quite expensive, both on a nominal and a (percentage) total return basis). Options programs can be run in one of two very general ways. The classical way of running an options program is as a hedging- or an insurance- policy. In this method, the investor has bought a stock, and she wants to either protect that position from price declines using puts or accentuate the expected gain using calls for example. The more modern way of running an options program is very akin to day-trading and generally is, for all practical purposes, a trading platform (usually involving naked calls- that is, options not supported by underlying stock position). Beginners are especially and strongly advised to steer clear of the latter.
The book would do well to include the following in future editions:
1. A glossary of key terms
2. A list at the beginning of the book of key terms, symbols and acronyms
3. An anatomy of a basic put and call option, complete with the principal elements of each, in the very first chapter.
4. A more colorful presentation, featuring the use of color, charts and diagrams, that can aid in explaining key points
5. Of considerable importance, ways in which those uninitiated into the world of options can run into problems, and how to avoid them.
6. Most important, a tabulation of the (additional) costs of running an options program, including one scenario using options as a traditional hedge and one for trading.
For the beginner looking for a more concise and easy-going introduction to options, I recommend two books- Bill Johnson's Options Trading 101: From Theory to Application and Michael C. Thomsett's Getting Started in Options. Of the two, Thomsett's is the better the book for the complete novice, with the added benefit of copious illustrations and exhaustive explanation (although not recommended for quick-study types, such folks can still find it useful as a reference). Those at the intermediate level might benefit from a reading of Options for the Stock Investor.
Potential readers of Mr. Olmstead's book should use it as a cursory, bare-bones introduction, and nothing more. Nonetheless, the book is not nearly as intimidating as some of the other books on the subject, such as McMillian's Options as a Strategic Investment, the standard bearer of the subject.