Options

[rjstc]

  Curious what people would recommend for one or two good books to read for someone who wants to learn about options or advice on using them. I have bought and sold stocks for a number of years. But it seems quite a few people use options in their investment approach. I'm not great in math but have invested successfully. Just want to expand my knowledge and see if I can understand options and use them in my investing. I use shorts very infrequently. Don't use margin. Try to use a value approach but have trouble figuring a clear intrinsic value to sell at. Own many of the stocks mentioned on these boards. Some of the holdings include holdings in a taxable account. Also holding about 30-35% cash at this point in time.  MSFT, L, JNJ, CSCO, LRE, ABT, ADP, MCF, INTC, MDT, RLI, UHT, VOD, WMT, WLP, and ATPG, BBEP, PFE, WRLD, AWH. Have profits in all, some long term some short term. Thanks for any help or suggestions. Ron

[Myth465]

Only 2 books have added value for me.

 

Joel Greenblatt - You Too Can Be A Stock Market Genius.

Micheal Lewis - The Big Short (The intro paragraph on Cornwall Capital).

 

I have learned quite a bit on this board as well. Also options are very danagerous. I lost a significant amount of money with options during the financial crisis. Its all been made back, and a good chunk of that using options. My advice is start small, go long term, and make sure you really understand how they work.

 

Its really just leverage, very cheap leverage. Which makes good deals great  ;D, and bad deals make you want to jump out of a building. I use an extremely simple option strategy. I buy calls on asymmetrical bets (will buy some on MBIA one of these days), and I buy calls / leaps on undervalued securities when I am sure there is a catalyst or they are too cheap to pass up. Typically deep in the money or at the money.

 

Of your holdings the only one I own options on is ATPG. Think about where they will be in 2013, then think about the share price, then think about the risk (Management, debt, oil prices, and hurricanes). Then place your bet. If you are right with options you could make 3-4 times your money. Wrong and you might lose half vs. flat to 15%. Once you add a time factor to it, I think you are gambling. Gamble intelligently / sparingly / and carefully (I should take my own advice)....

[rjstc]

  Thanks Myth. I own and have read many investing books. Grahams' Klarmans, Greenblatts, Templeton, Whitman, and many many more. I've gotten good ideas from all of them but have only developed a general procedure in investing from them. I'm not a good student I guess. However I have learned to gut invest from their ideas and for the most part have been successful except for the 2008 selloff where I tried adding to my positions as a general rule but was way too early this time. But at least have gotten that back. So saying that I guess one question would be would using Leaps, Calls, and Puts, be more of having a view of where a stock might be headed one way or the other down the road and using less money  for leverage or like a hedge to lock in your future prices? Thanks

[arbitragr]

Sounds maybe a bit too theoretical but should try Hull's option & derivatives book.

 

Also Taleb's books, since he was an options trader.

 

;)

[Myth465]

You can do alot of things with them. The main thing you have to realize is your bet must be right with respect to time, and price. I am pretty sure ATPG will hit $25 - $30. Will it be before my options expire I dont know. You could also use puts to hedge or short, and finally you can use options to take a smaller position. You can get similar upside, with less cash out-lied if you go deep in the money.

 

The best options situations are when there is a hard catalyst. A court case, a spin off, something. A good example is the oil and gas moratorium. Oil stocks in the gulf sold off 50% - 65%. The moratorium was 6 months. You could have bought 2 and a half year leaps on drillers, producers, and services companies and waited it out. Once it ended the prices of the stocks would reflat. You want situations like those inmo.

 

There are probably dozens of ways to use options, but thats how I use them.

[ubuy2wron]

"Options as a strategic investment "I think it is still in print explains most of what ya need to know.

[jb85]

the big short def tells you the good that can happen with options.   The guys from cornwall capital  turned 100K into $15 mil (no outside money) in 5 or 6 years by buying options on mortgages.   Their philosophy was buy options that pay 100x but only have a 10% of paying off  

 

 

[Packer16]

I have read the recommended books and value some of these for my job but Myth's explination is how I look at an option (buying cheap leverage).  Some others use options to buy synthetic stock if the call and put volatilities are too far apart and others have sold puts at prices they would like to buy stocks at.  The BS and other models give you some idea of value but I have not found them useful in using options for investing because the inputs specifically volatility cannot be precisely determined.  Just my 2c.

 

Packer

[arbitragr]

The BS and other models give you some idea of value but I have not found them useful in using options for investing because the inputs specifically volatility cannot be precisely determined.  Just my 2c.

 

Packer

 

Can use binomial. Just be conservative with vol ... if there's more than what you projected then that's all upside.

[Uccmal]

2nd chapter of "The Warren Buffett's Next Door".  The fellow profiled uses convered calls, and sells naked puts. 

 

I have had some success with Leaps at pivotal times.

 

I have never used any formulas as per Packer because they dont make any sense. 

[bargainman]

Interesting that most of the replies here are about buying options.  Personally I sell options more than I buy them, probably because I'm more conservative.  But if I want leverage I do buy leaps.  Selling Puts is a great way to get paid while waiting for a stock to hit your buy price.  Selling calls is a great way to get paid while waiting for your sell price.  But they are both low payout high risk scenarios, but that's offset by high probability profits, so it's all about what you want out of your investing.  Generally if I want unlimited upwards potential I buy the stock, then maybe some leaps.  But for monthly income selling puts or calls (in an unleveraged manner suits me).

[rjstc]

Thanks all for the posts so far. Ron