Options as a strategic investment has been a popular book among options traders since it was first published in 1992. Now in its fifth edition, this book provides detailed guidance on using options to generate consistent income, protect your assets, and build long-term wealth. Written by renowned options expert Lawrence McMillan, it skillfully explains options fundamentals, essential strategies, and risk management techniques. Here are some of the key points and recommendations from this essential options trading book.
Understand options basics and terminology
The book starts by introducing options terminology, contract specifications, and options exchanges. As a beginner, it’s important to understand these basics first before diving into options strategies. The book clearly explains key concepts like strike price, expiration date, premium, volume, open interest, and bid-ask spread.
Use options to generate income through short vertical spreads
A key options strategy highlighted in the book is using vertical spreads to collect premium income. This involves selling an expensive option and buying a cheaper option at a different strike price. The book details how to construct credit spreads, debit spreads, and calendar spreads to profit from options time decay.
Apply basic and advanced options strategies
The book covers basic strategies like covered calls and protective puts as well as more advanced strategies like straddles, strangles, butterflies, condors, and ratio spreads. It explains how to select suitable strategies based on your market outlook and risk tolerance.
Manage risks through position sizing, stop losses, and portfolio diversity
A recurring theme in the book is effective risk management. The author stresses the importance of only allocating a small percentage of capital to each trade, using stop losses, and diversifying across multiple uncorrelated trades. This helps mitigate risks in options trading.
Stay updated with the newest edition
With options trading continuously evolving, it helps to study the latest edition of this definitive guide. The fifth edition includes updated examples, new data, and a detailed OPTIONS INSIGHTS appendix. There are also revised recommendations on liquidity, position size, and tailoring strategies for different market conditions.
Options as a strategic investment provides comprehensive guidance on profiting from options while managing risks. Key recommendations include studying options basics, generating income from vertical spreads, applying suitable strategies, and diversifying positions.