The Intelligent Option Investor

by Erik Kobayashi-Solomon

Having only started trading options in the last year, I've had good success so far, but I’m always willing to learn more. Mr. Kobayashi-Salomon, a former Morningstar strategist who now runs his own company providing institutional investors with analysis and strategies,  now brings us The Intelligent Option Investor, a book that is not only about options, but about finding the true value of stocks and then acting on those findings within the limits of one’s risk tolerance (and ultimately, budget). The information could just as easily be used for regular stock investing, but it is targeted for broader use in the options market.

Based mainly on the Black-Scholes-Merton valuation formula and the resulting BSM “cone”, the author builds a formidable structure of value analysis tools and methods, carefully illustrating and explaining their actual application not only in finding the value of stocks, but also in finding the projected value of those stocks based on the options market prices that lie either inside or outside the valuation cone. It is heavy going but is very useful information that I found very useful and intriguing. This first section of the book is also very important to understanding the rest of the book, which deals entirely with options. The author demonstrates the uses of the BSM cone in a number of different option strategies. Because it is all about making the reader “intelligent”, this book is not so much about finding the best strategy, per se. So it tells you what to look for, what to expect, and then leaves it to you to do the grunt work of figuring out where to put your money. (There are plenty of online tools for achieving this, mostly just by using a good brokerage’s website.)

Personally, I found the value cone quite intuitive, but because I don’t have much experience with options, it really gave me a lot to think about and consider in my own investing (not just options). A more experienced option investor might feel talked down to, but nothing is lost by going over this material as a review or refresher. Another thing I found valuable is that this book provides different types of option investing strategies based on the BSM cone. This is great for me, because I am becoming more risk averse, so I have no problem using the strategies that limit downside risk and avoiding the big risk, big upside potential strategies. It’s nice that the author gives the reader these kinds of options (sorry).

One caveat is, you should already know how to trade options before diving into this book. The author doesn't spend a lot of time telling you what options are, how they are traded, and what the fundamental differences are between the options types. It really just sticks close to its title and the premise that it will make you an intelligent options investor, because it assumes you are already an options investor. In the end, I found this book really did teach me a lot about options that I didn't

know and it does make me a more intelligent options investor. The careful explanation of the BSM cone and is application makes this a valuable book for any investor, but for an option investor, it’s the most useful tool I’ve ever run across, which is why I rank this book at five dollar marks.

Understanding Options and How You Can Trade Like A Pro

by Michael Sincere

by Sarah Potter

I’m reviewing these two books together because they cover a lot of the same material. Obviously, Sarah Potter’s book, Trade Like A Pro is a lot broader and focuses mainly on trading strategies, analysis, methodologies, charts, graphs, and the nitty gritty details of making regular, and hopefully profitable, trades. Michael Sincere, on the other hand, in his book focuses only on options: what they are, how they work, and how to use them to broaden one’s investment strategy. Although options are certainly a speculator’s game, they also have a role in the average investor’s portfolio, whereas everything in Trade Like a Pro is geared to the person who is going to do just that: trade.

I found Mr. Sincere’s book much more up my alley, both from the aspect of the types of trades and the prices of the examples he uses, to the step by step walk through of a typical (and not so typical) options trade. Ms. Potter, on the other hand, assumes you know a lot and are ready for some advanced topics and analysis, and she also assumes you have a large war chest to start with. (For example, Mr. Sincere’s typical options sample trade uses Boeing at $88, while Ms. Potter uses Mastercard at $550. Does it matter in the end? Not really, but I know that $50K trades in options are nowhere in my near future, whereas $9K probably is.) I've been buying and selling equities for 28 years but had never ventured into options. After reading Understanding Options, I opened my options account and made my first trade. It really was as simple as reading the book, following the instructions, and executing the trade. As for Trade Like a Pro, I gained valuable insight into trend analysis and found remarkably similar approaches in simple moving average usage that is close to what I already do (and have been doing for years).

Really, I think reading these books together is a good approach, as they have similarities and differences in investment strategies that allow the reader to creatively think about their own investments (or in some cases, gambles). I rate Mr. Sincere’s book slightly higher because it is much easier to read and understand and for his laser focus on this one topic, but that is not to say it is better than Ms. Potter’s, whose book is full of useful ideas, suggestions and strategies. In the end, reading one or both of these books is sure to help most anyone who invests or speculates regularly in equities markets.