Khouw and Guthner, The Options Edge

If you’re just starting out in options, this is not the book for you. And for that I am grateful. There are a lot of good introductory options books but very few that address the intermediate trader or the experienced investor who wants to incorporate options into his portfolio. And fewer still that provide insights into how professional investors/traders craft and manage options trades to express their directional hypotheses or hedge their portfolios.

The Options Edge: An Intuitive Approach to Generating Consistent Profits for the Novice to the Experienced Practitioner (Wiley, 2016) by Michael C. Khouw and Mark W. Guthner starts with the basics but quickly complicates things by demonstrating their mathematical underpinnings. (The non-mathematically inclined can simply skip these sections and suffer no great loss.) It introduces the reader to trading volatility, option pricing, synthetics, and fundamental strategies. It explains how portfolios can be hedged using options to enhance returns and how to extract information from options prices. Perhaps most notably, it offers some options strategies for special situations such as potential short squeezes, skew opportunities, and dividend capture. And it explains how to analyze business opportunities as if they were options (think, for instance, of Berkshire Hathaway, which effectively sells puts and buys calls), with examples of both home runs and strike-outs.

This book is a healthy antidote to the usual fare offered to retail traders—buying single calls or puts on ostensibly fast moving stocks (often identified by questionable trading services), selling naked options in the hope that the probability gods favor you, or routinely placing non-directional trades on indexes. It challenges the reader to be creative in finding trading opportunities and structures, all the while admonishing him to thoroughly learn the intricacies of options so he won’t be blindsided.

I often say that if I get one good idea from a book I consider the read worthwhile. Well, I definitely got my one idea from The Options Edge. And even a little more. So, yes, I consider this book a winner.