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Full of Errors, Misinformation and Omissions - Should Never Have Been Published
on July 28, 2011
At first glance, I - like other reviewers - thought that Cohen had written a nice reference where one could quickly find an option strategy that matches market conditions. To a limited extent, the strategy table at the end of the book accomplishes this. If you want to trade these strategies, however, you will have to learn how somewhere else.
The axes of the six charts presented in each section are not labeled, do plot data and are too small to read. The chart captions refer to option strikes that are not shown on the charts. Neither are the break-even points that are discussed in the text. The volatility charts often show volatility swinging from negative to positive to negative (Volatility can never be negative, but since the axes are not labeled, I assume that is what he is trying to plot here); yet the chart caption only says that volatility is either helpful or harmful.
Also, the keys to the curves in the charts are inconsistent even though the curves appear to have been plotted for the same time frame. For example, on page 79 curves are plotted for options at "Expiration", "5 months to Exp.", and "1 month to Exp." while on page 60 the curves are plotted for "Expiration", "Today - 1 month", and "Time (t) - 5 days". I have no idea what the latter means.
The text is so full of omissions and errors that it is hard to believe that the people who endorsed the book (Bernie Schaeffer, Alpesh Patel and Price Headley) ever read it. Some examples follow.
In the examples of net credit trades (e.g., p.45) the author calculates a return on investment (ROI). There is no investment on a net credit trade.
The risk profile for a calendar call (p.63) has no key. What time period does this curve represent?
The example trade for a diagonal call (p.68) states that the short call option expires in the money (ITM), but does not acknowledge that as a result of holding short ITM call past expiration, the trader will be assigned a short position of at least 100 shares in the underlying stock.
As an example of a calendar put (p.73), the terms historical volatility and implied volatility are used interchangeable and both are said to equal 40%. Historical and implied volatility are distinct terms (the former refers to the stock and the latter the option), they are calculated differently and are rarely, if ever, the same.
The scenarios for a calendar put (p.74) correctly assume that implied volatility does not change. This same assumption should have been made for the calendar call (pp. 61-63) but is not.
The risk profile plotted for a diagonal put (p. 81) shows a maximum reward that is 100 times higher than the calculated value (p.80). Moreover, the actual values for net credits, net debits, maximum risks and maximum rewards for all the example trades in this book should be 100 times higher than what is calculated.
The example trade for a married put (p.88 - page not numbered) states that a stock is trading at 50.00 but is sold short at 49.75. How can you short a stock at a price that is below the current market value?
Throughout the book, Cohen instructs readers to "use online tools to find the optimum yields and breakeven points at and before expiration" (e.g., p.92). What are these online tools and where do we find them? He may be trying to say that before opening a position, we should find or acquire software that will plot a risk profile for that position at different time frames prior to expiration.
Throughout the book, the terms "net debit" (e.g. p. 96) and "interim risk" (e.g., p.105) are used interchangeable, but the book's glossary does not define either of them. Most traders know what a net debit means, but it is not apparent that net debit and interim risk mean the same.
In the example of a straddle (p.126) the breakeven points would be more helpful if they were further apart, not more narrow.
In the example of a strangle (p.131), the breakeven points are $1.30 wider at expiration, not $0.65.
Throughout the book (e.g., p.139) we are told to find an option whose implied volatility is very low, but the stock is about to make an explosive move. Only insiders have this sort of information, and if they are caught using it, they'll go to jail.
We are told to compare guts (an option strategy) to a straddle and strangle "using the Analyzer" (p.143). What is the Analyzer? It is not in the glossary or explained in the text.
The net debit for the example guts (p. 147) should be $4.20 + $3.80, not - $3.80. And the maximum risk is the net debit - difference in strikes, not the net debit - difference in premiums.
In calculating the net credit for the example short put butterfly (p.156), the premiums bought should total $9.66, not $9.64.
In the diagram for a sideways strategy (p. 176), if the middle strikes of a Long Put Butterfly are separated, the position becomes a Long Put Condor, not a Long Call Condor.
The puts and calls sold in the example of a short strangle (p. 185) are only one strike apart. No one in their right mind would make such a risky trade.
In the description of a long call condor (p. 198) the two middle options are sold, not bought.
The description of a modified put butterfly states, "This is a fiddly strategy and should only be used if you have an analyzer handy.." (p.212). What is a fiddly strategy and where would one find this analyzer?
In calculating the maximum reward for a modified put butterfly (p. 216), the middle strike should be $55.00, not $50.00; the net credit should be $0.98, not $4.02, and the maximum reward should be $4.02, not $5.98.
In selecting options for a call ratio backspread (p.221), the higher strike option should be one or two strikes higher than the sold strike, not the bought strike.
The rationale for a put ratio backspread (p. 225) should be that you are looking for the stock to fall significantly, not rise significantly.
The rationale for ratio call spread (p.230) states that this should be a net credit trade, but the risk profile (p.231) and example (p.232) are for net debit trades.
In selecting options for a collar, the put strike should be ATM or just OTM (p. 243), but in the example trade (p. 245), the put strike is ITM.
"Uncapped reward if the stock falls" is said to be an advantage of a synthetic put (p. 253). The maximum reward is actually capped at the stock price - call premium (pp. 252-253).
The maximum risk for a long call synthetic straddle (p. 256) is limited if the stock does not move decisively, not if the stock rises.
In trading a short call synthetic straddle (p. 263), the trader would buy, not sell, 50 shares for every call contract he or she sold, not bought. Also, you would sell two ATM calls per 100 shares you buy, not sell.
In trading a short put synthetic straddle (p. 267), one would sell two ATM puts, not calls, per 100 shares you sell, not buy. The put's OTM strike would be lower, not higher, than the current stock price.
In exiting a short synthetic future (p. 278), you cannot "exit just your profitable leg...". Both legs are either profitable or unprofitable.
I'M GLAD THAT THE OTHER BIBLE IS NOT AS SCREWED UP AS THIS ONE.