The Rookie’s Guide to Options: The Beginner’s Handbook of Trading Equity Options
Mark D. Wolfinger (W&A, 2008)
One of the ideas central to Mark’s work in his blog, his magazine articles, and in this book is that options are an excellent tool for just about any investor who wants to manage risk more effectively. What’s especially admirable about this book is that it takes a reader with no prior knowledge about options from the most basic concepts all the way through to advanced risk management and double diagonals in a little over 200 pages, and without sacrificing any clarity. There seem to be new introductory options texts published every year, but The Rookie’s Guide to Options stands out as one of the few texts that really deserves a reading from cover to cover. When new traders ask us to recommend an introductory book, this is where we will send them.
Part 1 introduces basic option concepts and key features of the options market in plain language. Discussing the components of the theoretical value of an option or the difference between implied and realized volatility in jargon-free language is harder than it sounds, and Wolfinger’s conversational approach is very effective in this respect. A review of order types, assignment, and the role of the OCC may seem almost too basic, but on more than one occasion we’ve heard from traders who were using complex spread types but had an irrational fear of early exercise; it never hurts to review the fundamentals. It’s also nice to see discussions of volatility and risk management placed before examination of any particular strategies.
Part 2 presents what Wolfinger calls the “basic conservative strategies,” namely covered call writing, collars, and writing cash-secured puts. These are the sorts of bread-and-butter strategies that retail investors can (and, in most cases, probably should) use to reduce portfolio volatility and possibly even improve returns. For traders who start to yawn a little at the thought of yet another discourse on covered calls, Wolfinger freshens up the material by examining the viability of the strategy via a comparison of the S&P Total Return Index and the CBOE’s Buy-Write Index (BXM). The presentations of collars and naked puts are also quite thorough, including analysis of techniques for dealing with losses and trades that are under pressure. Chapter 15, on synthetically equivalent positions, is essential reading.
Part 3 delves into some more advanced topics, but retains the conversational tone and example-heavy approach of the earlier sections. After treatment of the greeks and of American vs. European options, Wolfinger explains credit spreads, iron condors, and double diagonals. To the extent that the final three chapters are all about iron condors and variations thereof, this is the most attention paid in any book to date to the sorts of positive theta, market neutral positions that we teach on our site; for that reason alone we expect the book will be of interest to our readers. What’s particularly valuable about Wolfinger’s discussion is that he really engages with the strategies, going well beyond the basic descriptions and profit/loss graphs you would expect. One of the traps novice option traders often succumb to is the illusion that any one strategy or spread type is inherently better than the rest; while we all have our favorite techniques, one of the most laudable features of this book is that it puts that illusion to rest, giving a clear account of when and why a given spread or technique is called for.
The little bonuses are a nice touch: the book includes a CD-ROM with an option pricing calculator and an archive of Wolfinger’s published articles, and the quizzes at the end of each chapter are helpful.
For more book reviews and reading suggestions, check out our Recommended Reading page.