Wednesday, October 26, 2016

Kinahan, Essential Option Strategies

J. J. Kinahan, chief strategist and managing director of TD Ameritrade, formerly of thinkorwim, has written a primer for would-be options traders—Essential Option Strategies: Understanding the Market and Avoiding Common Pitfalls (Wiley, 2016). The book is clearly written and well developed, and it more or less covers all the bases. But since it is but one of many introductions to trading options, what distinguishes it from its competitors?

For starters, it avoids the sometimes difficult math that litters beginning books on options. The only concession to numerical concepts is Kinahan’s heavy reliance on standard deviation. But even here, he says simply that “SD refers to the range of stock prices around the average price or mean. The theory says that a stock will close within one standard deviation roughly 68.2 percent of the time, within two SDs 95.4 percent of the time, and within three SDs 99.7 percent of the time.” That, and elementary school math, is all you need to understand Kinahan’s primer.

Second, Kinahan gives a lot of space in this book to probability cones—the probability of profit and the probability of touching. With each strategy he discusses he provides not only a risk graph but also two probability cones. He uses these cones to determine whether the price of a position is worth paying. For instance, in the case of long vertical spreads, as a rule of thumb he is looking for “a better than 50 percent probability of the position at least breaking even and an 80 percent or better probability of it touching the higher strike through the expiration.”

Third, Kinahan walks the reader through case studies, with time parameters, risk factors, and of course probabilities.

For the beginning trader, Kinahan’s book is valuable. The intermediate trader may find a few tips that he can incorporate into his playbook. The advanced trader, or anyone with a quant bias, can move on.

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