Jabbour and Budwick, The Option Trader Handbook

As option trading expands so does the world of option education. Sites such as the CBOE provide free courses, webinars, and short videos. Former option traders trip over each other in the effort to earn money from teaching instead of trading. And brokers spend a lot of time explaining their increasingly sophisticated software.

The retail option trader who simply buys calls or puts and waits until expiration to see whether he made money or lost his entire stake feels no need for this kind of education. He is in effect buying a lottery ticket, and who goes to school to learn how to play the lottery? But the person who takes option trading and risk management seriously needs some help. What factors should he consider when putting on a trade, and—more important—how should he manage that trade?

What distinguishes The Option Trader Handbook: Strategies and Trade Adjustments (2d ed., Wiley, 2010) from the spate of available books on options is that the authors, George M. Jabbour and Philip H. Budwick, concentrate on trade management. They cover both the use of options to manage stock positions and the care and feeding of “pure” option positions. In a section new to the second edition they analyze the Greeks and risk management, but the authors recognize the myopia that can result from fixating on the Greeks. The bulk of the book is devoted to their risk/reward approach to trade adjustments in a series of "what if" scenarios.

For instance, after you’ve established a 35/40 bull call spread the stock slides to $32. If you want to adjust your position, what alternatives are available? And what is the risk/reward profile of each alternative? Or you’ve put on a 35 calendar spread and close to the expiration of the front month option the stock moves to 37. Short of simply taking the loss, which is often the wisest course, what repair strategies can you employ?

The authors focus on calls and puts, vertical and time spreads, and straddles and strangles. They spend very little time specifically on butterflies and condors (just how to roll a vertical spread into a butterfly and a butterfly into a condor). But since these combinations can readily be dissected into positions they analyze in great detail, this is not a serious omission.

Although this book is lengthy and does not lend itself to a once-through cover-to-cover read, it provides the sophisticated novice to intermediate option trader with a series of game plans that can make the difference between winning and losing. That makes it an invaluable reference work.