Book/Website recommendation on stock option strategies

[gokou3]

Per subject, does anyone have recommendations for a good book or website to learn about option strategies?  I know how puts and calls work, etc. so I guess I am more interested in the intermediate/advanced stuff, e.g. learning about specific option combos to apply at various situations.  For example, if XYZ is at $20 and I expect it to go to $25 in a year, with expected worst downside at $15, what would be the most optimal strategy?

 

I have read a few books already but they seem to either fall along the "get rich quick" scheme or not provide enough depth.  Also, as a long-term investor (hope "option investor" doesn't sound like an oxymoron) I find the option greeks to be not very useful.

 

Thanks in advance.

[oldschoolsting]

You may want to take a look at Options as a Strategic Investment by McMillan if you haven't already.  I haven't read it but I know someone who has used it to implement a ton of different strategies.  It seems to cover every combo imaginable. 

[Packer16]

I have read that book and it explains the strategies but from my experience the simple strategies work the best.  If you want upside leverage buy calls or downside protection buy puts.  The large bid/ask spreads and commisions on most options for me have made only these basic strategies worth my time.  I look a calls as buying the strike price's amount of debt and the interest rate is the option price less intrinsic value divided by the strike price.  My best buys were on underpriced call on Farifax when the shorts were driving down the permiums.  There are others on this board who use options more and they may be able to provide you some other insight.

 

Packer    

[oldschoolsting]

I look a calls as buying the strike price's amount of debt and the interest rate in the option prce less intrinsic value divided by the strike price.

Packer   

 

Packer-

I'm a little confused.  Can you explain? Thanks!

[Packer16]

I corrected my English above but the idea is a call option is the equivalent of buying the stock on margin with no downside beyond the premium.  The premium can also be looked at as the price of interest for borrowing the strike price plus a downside guarentee.

 

Packer

[arbitragr]

John Hull

[username]

Packer

I would add that in case the options are deep in the money, the dividend yield and the hurdle rate of the debit, should be taken into account as well.

 

John Hull

I will second that. The solution and the assignment manuals are both very useful, for better understanding.

[Uccmal]

Hi Oldschool,  I am with Packer on this topic.  I have read about various strategies, but stick pretty much these days to buying call options - nearly always Leaps on stocks I may buy anyways.  It is a leveraged way to buy value stocks.  Recently, I sold my GE Jan. 2012s and bought GE Jan 2013s.  I exercised all of my FFH jan 2011 options last week.  I have done extremely well with this strategy but it has taken some refinement, mostly through trial and error. 

 

I have tried writing puts which was an expensive lesson.  There are easier ways to earn income, IMO.  Writing puts eats up an enormouse amount of capital in your account to cover the collateral.

 

On occassion I will buy put options on the index - the last time of any significance was in the summer of 2008.  I made a little off of these but sold way too early.  It is far easier to invest for the up side than downside.

 

I stay with options that are very liquid.  The GE option tranches trade in the hundreds or thousands of contracts per day.  Same with options on most megacaps.

[gokou3]

Thanks everyone for the valuable suggestions.

 

oldschool: i will check out Options as a Strategic Investment.

 

packer: I agree with your statement that "call option is the equivalent of buying the stock on margin with no downside beyond the premium.  The premium can also be looked at as the price of interest for borrowing the strike price plus a downside guarentee."  For certain stocks, the premium is so small that it barely covers the interest and the downside guarantee comes "free"

 

Uccmal:  I have been using LEAPs too, the most recent one being VOD Jan2012 20 calls that I bought earlier this year which has turned out quite well so far.  How do you select a strike price?  For VOD I chose a slightly OTM strike (at the time) because the premium was so small.  It seems to always be a trade-off between leverage, premium cost, and downside protection.

[eclecticvalue]

Has anyone looked at buying LEAP puts for netflix? Seems like a safer way to bet for downside only thing is the market can stay irrational for a long time.

[Uccmal]

Uccmal:  I have been using LEAPs too, the most recent one being VOD Jan2012 20 calls that I bought earlier this year which has turned out quite well so far.  How do you select a strike price?  For VOD I chose a slightly OTM strike (at the time) because the premium was so small.  It seems to always be a trade-off between leverage, premium cost, and downside protection.

 

Hi Gokou, Pretty similar.  Around the strike price either way - more likely 0-20% above.  No speculating on large price rises.  I want the margin of safety in the stock itself.  No fancy formulas.  I am using the Leaps as a leveraged way to buy comon stock.  Your Vodafone example is exactly what I would do.  You have chosen a stock where you will get more bang for your investment dollar on your thesis which is pretty much what I do.  Right now I only have GE options left but have used the strategy on around 15-20 different companies or SPYs, mostly to success. 

[Uccmal]

I just read a chapter of the book "The Warren Buffett's Next Door".  The second or third story in has a profile of a fellow who has sold put options and used covered calls extensively.  Sounds like he does very well.  I will be reading the rest of the book over the next couple of weeks at Chapters. 

 

A couple of board members hereon have alot of experience at these strategies - Ericopoly for one.

[Packer16]

If you want to look at 2 interesting call option opportunties look at SVU (Supervalu) LEAPs and Excelon LEAPs.  Remember however (based upon loss experience in the past) these opportunties look a lot easlier going in than they actually turn out to be. 

 

Packer

[EdWatchesBoxing]

I will be reading the rest of the book over the next couple of weeks at Chapters.  

 

Just buy the damn book already (from an indigo shareholder)  ;)