Lawrence G. McMillan’s book “Options as a Strategic Investment” is regarded as a classic in the field of options trading and investing. As the title suggests, it focuses on how to use options strategically to enhance investment returns and manage risk. This book provides comprehensive coverage of options concepts, strategies, pricing models, and risk management techniques. With detailed examples and clear explanations, McMillan demystifies the complex mathematics behind options. Some core insights from this essential guide include using options to generate income, protect stock positions, leverage investment capital, speculate on volatility, and implement advanced trading strategies. By mastering principles in this book, investors can gain strategic advantages and improve their investment performance. With proper application, options can become powerful investment tools for both amateur and professional traders. This book equips investors with knowledge to invest in options prudently.
In-depth overview of fundamentals of options and derivatives
McMillan’s book provides a thorough grounding in options basics before delving into advanced concepts and strategies. Key foundations covered include how calls and puts work, basic strategies like covered calls and protective puts, intrinsic and time value of options, the Greeks risk measures, volatility, pricing models like Black-Scholes and binomial trees, synthetic options positions, spreads, combinations, ratio trading, volatility strategies and more. Readers gain a robust understanding of options market structure, mechanics, risks and core principles.
Utilizing options to enhance equity returns
A major focus of the book is using options in conjunction with stock positions. Call options allow investors to gain leveraged upside exposure to anticipate stock gains. Puts can hedge downside risk in existing share holdings. Collars combine calls and puts to lock in profits. Covered calls generate income by selling call options on stock owned. Advanced tactics like LEAPS, ratio spreads, straddles/strangles, butterflies/condors can further optimize returns.
Risk management applications of options
Options excel at managing portfolio risks. Protective puts limit the impact of unexpected stock declines. Married puts combine owning stock and puts to participate in gains while defining maximum loss. Spread trades cap both profit and loss. Volatility strategies like straddles/strangles capitalize on big price swings. Options allow tailoring risk/reward payoff profiles to one’s objectives.
Speculating and trading volatility with options
Options prices are highly sensitive to volatility. McMillan devotes a chapter to trading volatility itself. Times of low/high volatility create opportunities. Tactics include long/short straddles/strangles, ratio spreads, backspreads, butterflies, time spreads and more. Mastering volatility trading unlocks a new alpha source and complements directional trades.
Sophisticated strategies and advanced applications
McMillan explores more advanced strategies like ratio trading, backspreads, butterflies, condors, combinations, spreads on spreads, time spreads and synthetic options positions. These tactics offer defined, quantifiable risk/reward profiles. Detailed examples demonstrate constructing positions to achieve specific payoff diagrams. The author also discusses income strategies, portfolio insurance, arbitrage opportunities, volatility skews, early exercise decisions, position management and taxes.
Lawrence G. McMillan’s “Options as a Strategic Investment” provides comprehensive, practical knowledge for using options strategically. It covers core concepts, strategies, pricing models, Greeks, spread trades, volatility trading, advanced tactics, income generation, risk management and more. Traders can gain strategic advantages and alpha opportunities from options by studying this definitive reference guide.