MRM,

Though I agree with your final conclusion and respect your opinion very much, I don't think individual investors are competing with your cousin at all. They might be on the same field, but they are playing two wildly different games. I'd actually argue that small investors benefit from his actions. If he is improving price .01% he has to do 100's or 1000's of options to make any money. This creates A) tight markets, and B) Highly liquid markets for individuals.

In regards to the OP's question on books, I usually tend to turn away from any book that claims a "Get Rich" method. The book I was forced to read and understand before I was allowed to trade was Sheldon Natenburg's "Option Volatility and Pricing." Not a fun read, but an educational one.

If you are looking for a get rich quick method with options, you'd probably do as well going to Vegas and putting it all on red or black. With the added advantage that you wouldn't have to read any books.

I know Rich and his Father from the exchange floor and both his and MRM's conclusions are spot on.

The "Quant's" as they are known in the financial circles all play on the same field as Rich noted, the big difference is they are playing an entirely different game. Agreeing with Rich again, they actually make the markets more efficient and therefore hand that benefit free of charge to the public. Since you’re an end user and not a liquidity adder these are boom times for end users.

330, the title makes it a book I would never pick up. The content may be worthwhile but since I have not read it I can’t say. There are no magic formulas and I suspect the guy who wrote it outlines four variations on some common strategies which are probably sound strategies.

Agreeing with Rich yet again, the Natenberg book is sort of the bible. Larry McMillan’s Options as a Strategic Investment, used to be the only bible until Natenberg’s book supplanted it. Either one of those books are a difficult and lengthy read, filled with equations which are worth mastering if you’re going to be very serious. On the other hand all of the mathematical mastery of options has been priced out of the market from an individual investor’s standpoint. The concept of implied volatility vs. historical volatility is still extremely relevant.

Without spending the time to get too deep, think of the price of an option as a cube, each of the six sides represents one of the variables. Some are subject to a great deal of fluctuation other are not, and some have a great impact on the price of the options and others much less. In the end anytime one of those six variables changes in order for the price or “fair value” of that option to remain true the cube must be intact. Therefore the rest of the variables are affected, it just depends which you’re solving for. Typically the individual investor only cares about the value of the options where as the quant’s are looking to take advantage of one of the six variables. (Time, implied volatility, interest rates, strike, put/call and dividend stream). There are endless strategies to profit from changes in the other variables which are not static.

Rich, my Lindsey's are being shipped on Monday... Stop over to my office if you have time the following week.

Pick a stock you think will go up.
Buy the call option.
If it goes up, you can retire early.
If it goes down, you just lost all your money.

Buying calls is a suckers game. Because of the nature of the volatility curve, straight long calls (as long as they’re not parity calls) will always underperform the market if the stock goes up.

Long put and long stock = long call. If ABC is trading at 100 bucks common sense says that the 90 strike put should be priced the same as the 110 call, they’re both 10 bucks out of the money. The mathematical probability that either will be in the money at expiration is roughly equal, except that assumes normal distribution on a bell shaped curve. The 90 put will always be more expensive than the 110 call because of the shape of the volatility curve. Long put and long stock is known as the "synthetic" or "Synthetic call". Institutional traders, if they are going to be leaning long on a directional play will almost always use the synthetic version.

Options are great for short term trades up or down, more bang for your buck than buying the stock. Buy several months out in time to decrease the loss due to time degradation, one or two strike prices out of the money. Sell the option contract when you would sell the stock for a trade, not an investment.
Like others have said they can be used as insurance. Or, on stocks you own and don't plan on selling sell the out of the money calls/puts monthly, depending on the market movement, use that money to buy more of that stock when the stock is at a good price.

I don’t agree. Buying more time increases your risk since there is more premium to lose. Out of the money calls also drastically underperform the market for the reason I touched on above. If abc is trading at 100 and you buy the two month 110 call, say for two bucks, if the stock moves to 105 or 107 in a few weeks that call is probably going to be worth less than you paid. The implied volatility variable will go down as the stock moves higher and therefore the price of the call will severely underperform the market.

If I trade options the contracts are held days to maybe a week so if time is bought there is minimal degradation. Out of the money allows me to buy more contracts. The option trades have been high cost fast moving stocks like apple or amazon. In and out quick money trades usually technical or event driven.
On stocks that are owned, the out of the money next months options are sold so it does not get called out then the option is bought back at a lower price. Sometimes, that can be done a couple of times a month. Over the year of dividends and selling options it adds up.
Everyone has their own style, this works consistently for me.

The daily price decay on any contract can easily be calculated and you can use the implied volatility and time to expiration to plot the chart so there is no mystery. Although you mitigate some of the decay risk by holding for short period of time as you say you like, it becomes a double edged sword when you don’t get the up move you need. In addition as the stock moves higher the implied volatility moves lower so now you have both time and implied volatility working against you on any upwards move.

Very very very few people are able to time the markets so well as to be consistently a net winner in that game, and its been tried for decades. If the trade is event driven, you have another issue. Since the date when the “event” is going to occur is known by the market, if it’s a significant event implied volatility will already have a premium in it, priced enough to mitigate any profits unless the event causes a much greater than forecasted move to the upside. In many more cases than not even if the stock rallies after the event, out of the money calls will fall in value, not move in value or move much less than the one would expect. When you trade stocks that have a high dollar cost (stocks in the 100 or 200 or higher per share value) then the premiums in the options are proportionally higher which in real dollar terms exaggerates the risk for the individual investor when those calls decay for time or go down because the stock goes down or does not move up enough.
In terms of call selling, the new era for market volatility started about 10 years ago and what was once considered a low volatility level (roughly 20 in the SandP 500 VIX) is now considered very high volatility and VIX values in the low to middle teens are the norm. With the VIX in the area it has been for a decade the premium in out of the money calls is hardly worth the risk assumed by selling it. Most institutions abandoned premium selling strategies nearly a decade ago when the risk reward headed south with the VIX. Its called “picking up dimes in front of a steamroller”

I am not saying those strategies cant work or don’t work. I am saying that they have been tried for years and typically in the end they don’t net a whole lot. You tend to make a lot of small gains which get wiped out on one or two bad ones. History is very clear on that.

It's easy to grin,
when your ship has come in,
and you've got the stock market beat.

But the many who's worthwhile,
is the man who can smile,
when his parts are too tight
in the seat.

Judge Smails.

"Go ahead Pookie"

“I christen thee the Flying WASP"


One of my all time favorite movies, I can quote most line from memory

If you have to ask for advice about options on an internet message board, you should never think about trading puts and calls.