By: Larry MacDonald

I’m reading a great book on stock options entitled The Rookie’s Guide to Options: The Beginner’s Handbook of Trading Equity Options, written by Mark Wolfinger. It looks like a textbook (a slim one) but don’t be scared off: it isn’t a dull or strenuous read at all – at least that’s what I found.

In fact, I found it well written and easily understood. It doesn’t get bogged down in a lot technical minutia but explains in an intuitive way the central ideas such as the Black-Scholes method for valuing options and implied volatility (all in the first third of the book). As long as we understand the ideas behind the formulae, we can let the online calculators do the actual crunching of the numbers.

Still, I have to admit when I first picked up the book, I was a bit wary. The leverage in options is seen by many people as the route to a big score, but statistics show that the vast majority of option users with such aggressive orientations end up loosing their money. Then they swear off options for good, denying themselves a tool that could improve the performance of their portfolio in other ways.

But the author won me over with his sensible approach. Throughout the book he cautions readers to avoid swinging for the fences and instead focus on using options to reduce risk and/or implement conservative strategies that belt out singles and doubles. Small, but consistent, gains are a more sustainable strategy that trying to hit home runs.

Even if you want to use options to speculate aggressively, you should begin with conservative strategies, recommends the author. There is no better way to learn about options and see how they are affected by volatility, time decay, etc. than actually trading them — so do it in a manner where loses aren’t going to be overwhelming. I thought that bit of advice was worth the price of admission itself. It takes away some of the fear for the neophyte to know they can ease into options in a relatively safe way.

Wolfinger allots about a third of the book to explaining three strategies for conservative and/or beginning investors: i) covered call writing (selling options against stock holdings to earn extra income, ii) collars (adding a put option to a covered call position to protect against a large loss), and iii) cash-secured, or naked, put writing (sell a put option to earn income and buy a stock at a lower price).

After the section on conservative strategies, Wolfinger devotes the last third of the book to more advanced topics such Greek terminology, European-style options, credit spreads, iron condors, etc.

Rookie’s Guide to Options: The Beginner’s Handbook of Trading Equity Options, Mark Wolfinger, W.A. Publishing (2008)