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Options as a Strategic Investment

Options as a Strategic Investment

The market in listed options and non-equity option products provides investors and traders with a wealth of new, strategic opportunities for managing their investments. This updated and revised Fifth Edition of the bestselling Options as a Strategic Investment gives you the latest market-tested tools for improving the earnings potential of your portfolio while reducing downside risk—no matter how the market is performing.

Inside this revised edition are scores of proven techniques and business-tested tactics for investing in many of the innovative new options products available. You will find:

•Buy and sell strategies for Long Term Equity Anticipation Securities (LEAPS)
•A thorough analysis of neutral trading, how it works, and various ways it can improve readers’ overall profit picture
•Detailed guidance for investing in Preferred Equity Redemption Cumulative Stocks (PERCS) and how to hedge them with common and regular options
•An extensive overview of futures and futures options

Written especially for investors who have some familiarity with the option market, this comprehensive reference also shows you the concepts and applications of various option strategies — how they work, in which situations, and why; techniques for using index options and futures to protect one’s portfolio and improve one’s return; and the implications of the tax laws for option writers, including allowable long-term gains and losses. Detailed examples, exhibits, and checklists show you the power of each strategy under carefully described market conditions.

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  1. 165 of 175 people found the following review helpful
    3.0 out of 5 stars
    A four-star book but a three-star update., February 21, 2013
    Chris G. Pflum (Las Vegas, Nevada) –

    Verified Purchase(What’s this?)
    This review is from: Options as a Strategic Investment (Hardcover)

    Several years ago my broker recommended the 4th (2002) edition of this book. I liked it so much that I bought two of McMillan’s subsequent publications: McMillan on Options, Second Edition (Wiley Trading) (cited as McMillan, 2004) and Options for Volatile Markets: Managing Volatility and Protecting Against Catastrophic Risk (Bloomberg Financial) (cited as McMillan, 2011). I’ve learned much from McMillan’s books and have given them four-star reviews; however, I am a bit disappointed in the updates to this 5th edition.

    Having read the 4th edition and two subsequent publications, I did not find any significantly new material in this 5th edition. About 85% of the book repeats information in the 4th and possibly earlier editions. The new material includes a chapter on mathematical applications (pages 447 – 477) and an expanded discussion of volatility (pages 767 – 947). The mathematical applications give a good overview of an option’s theoretical value. If you want to learn how to calculate theoretical values, however, you should also read Options, Futures, and Other Derivatives (4th Edition) (Hull, 2011).

    Although new to this book, much of the information on volatility was previously published in McMillan 2004 (pages 241-568) and McMillan 2011 (pages 171 – 204). For example, Figures 41-2 (p 872) and 41-3 (p 878) in this book are identical to Figures 9.1 and 9.9 in McMillan 2011. Also, much of the volatility – related text and several of the tables in this book are similar to those in McMillan 2004 and 2011. While one might criticize McMillan for repackaging the same material in different books, on the positive side: If you buy this book, you do not need to buy the other two.

    I am disappointed that this 5th edition still uses hypothetical examples, rather than actual trades. While hypothetical examples are useful in explaining how to construct a position or to illustrate a position’s sensitivity to individual variables (i.e., the Greeks: delta, gamma, vega and theta), they often do not give one a practical sense of whether the trade would be profitable or even feasible. Moreover, the hypothetical examples are mathematically rigged to give simple outcomes that do not occur in real trades.

    Throughout the book McMillan advises his readers to construct option positions that are insensitive or “delta-neutral” to changes in the price of the underlying stock (e.g. Chapters 6, 11, 12 and 13). In his example of a neutral calendar spread (page 215) he buys 7 April 45 calls and sells 8 July 45 calls. The ratio of calls bought to calls sold was calculated from an unrealistic delta ratio of .7/.8. Actual delta values are expressed to at least four decimal places. A neutral position based on deltas rounded to the nearest tenth would be far from neutral.

    Chapter 40 explains how to create a position that is neutral with respect to both gamma and delta and would profit at a specific rate (vega) if implied volatility increases or decreases (pages 835 – 836). Theoretically, such a position would be insensitive to changes in the stock’s price but would profit with changes in implied volatility (IV). The example trade sells volatility; i.e. it would profit by $238.00 for every 1% drop in IV. To construct such a position for the hypothetical “XYZ” stock, one must buy 100 April 50 calls, sell 173 April 60 calls and short 1,759 shares of XYZ stock. In my opinion, this is an extremely large position just for the sake of making a profit when implied volatility drops.

    I constructed two delta / gamma neutral spreads in a simulated account using the same math and methods that McMillan used in his example. One spread on Apple Computer (AAPL) would profit if implied volatility drops, and another spread on General Electric (GE) would profit if implied volatility rises. Unlike McMillan’s example, the only way I could come close to achieving a delta / gamma neutral position was to specify a more modest return from vega e.g. -100.00 < position vega < 100.00. The position vega in McMillan’s example is 278.00. Like McMillan’s example, these were extraordinarily large positions; so large that the 500,000.00 cash balance in my simulated account did not provide sufficient margin to execute either trade. If anyone wants to see the specifics of these simulated trades, leave a comment or send me an email.

    McMillan 2004 (page 505) includes a similar example of a huge position (555 contracts) that is…

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  2. 69 of 75 people found the following review helpful
    3.0 out of 5 stars
    XYZ Stock, October 27, 2013
    To Protect the Innocent (San Francisco, CA USA) –

    This review is from: Options as a Strategic Investment (Hardcover)
    I have this book, it is 1000 pages long. It is thorough, and packed with lots of information about different ways of using Options, analyzing them, volatility, and every options-related topic you can possibly think of. What’s important to note about this book is that it’s all theoretical. They use XYZ stock in all their examples, but none of the discussions are based on anything you find in the real world.

    For example, they’ll tell you all about Straddles, and you might surmise it’s a good strategy to buy a Straddle just before they announce earnings, and ride the wave to riches. It makes sense: the Straddle makes a profit when there is a large move up or down, and has limited losses if nothing happens. But if you ask a real trader about this approach, they might say “oh, don’t do that… you’ll lose your shirt” – when there is a break-out, you win big, but 80% of the time the results are “meh” and you are forced to close out your Straddle. You’ll be broke before you get rich.

    My main complaint about this book is that there is not one real-world case-study. It’s no use to have an encyclopedic reference that tries to clearly explain everything, without finally concluding which of these things is useful in making a profit.

    I found that this book can be skimmed because there is a lot of self-similar material, and because it’s so dam long, you’ll be wanting to skim it to get to the good part – but it never comes.

    Learning options is like trying to memorize a telephone book. There’s lots of information, it’s neatly organized, and all makes total sense, but what on earth will you do with it all? I’ve looked at a few highly-regarded, super-thorough hardcover academic-style books, but I have not yet found any book that gives you insight in how to be successful with options.

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  3. 27 of 28 people found the following review helpful
    4.0 out of 5 stars
    The second best book on options out there in my opinion., November 28, 2012

    Verified Purchase(What’s this?)
    This review is from: Options as a Strategic Investment (Hardcover)
    this is a good book. I was disapointed on its coverage of certain strategies, like iron condors, for that read Benklifa, but overall this is a masterpiece. Another even better book is by Natenberg. With this book and the two others I mentioned, you will go a long way.
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