Options Trading Strategies – Book Review – Guy Cohen, The Options Strategies Bible
Most of the trading literature on options strategies tends to lean toward mathematical formulas to define the construction of a spread. Guy Cohen has chosen to use pictorial logic, even with the exclusive Greeks of a particular strategy, to bring the legs of an extension together with diagrams.
Diagrams that connect to each other are a much more intuitive way to learn for those less inclined to number formulas. Still, the logic of mathematics remains solid and intact.
The layout of the book makes it easy to navigate through the text. In addition to the strategies that are listed by chapter and page, there is a reference to the main category of the strategy with subcategories, which are:
- Competition: Novice, Intermediate, Advanced and Expert Trader.
- Direction: Bullish, Bearish and Neutral Direction.
- Volatility: high volatility and low volatility.
- Risk / Reward: Limited Risk, No Limit Risk, Limit Reward, and No Limit Reward.
- Type: Income and capital gains.
Guy Cohen has extensive experience in derivatives and equity markets in the US and UK. He specializes in business and analytical applications ranging from real estate to derivatives and has developed comprehensive business, trading and training models, all expressly designed for maximum ease of use.
There are proper reader reviews on Amazon and Google Book Search, to help you decide if you will get the book. For those just starting out or about to read the book, I have summarized the core concepts in the most important and essential chapters to help you read them faster.
The number to the right of the chapter title is the number of pages that chapter contains. It is not the page number. The percentages represent the composition of each chapter of the 302 pages in total, excluding the appendices.
1. The four basic option strategies. 20, 6.62%. 2. Income strategies. 68, 22.52%. 3. Vertical spreads. 30, 9.93%. 4. Volatility strategies. 56, 18.54%. 5. Lateral strategies. 44, 14.57%. 6. Leveraged strategies. 20, 6.62%. 7. Synthetic strategies. 54, 17.88%. 8. Taxation for traders of shares and options. 10, 3.31%.
Focus on Chapters 2, 4, 5, and 7, which make up about 74% of the book. These chapters are relevant for practical business purposes. These are the key points for these focus chapters, which I summarize from the perspective of a retail options trader.
Chapter 2: Income Strategies. These strategies build spreads in which part of the margin sells Theta as a premium in a shorter term (typically 30 to 45 days), to raise revenue. In its entirety, the strategy may result in a Net Debit or Net Credit spread. There are 13 types of spreads in this category: Covered Call, Short (Naked) Put, Bull Put Spread, Bear Call Spread, Long Iron Butterfly, Long Iron Condor, Covered Short Straddle, Covered Short Strangle, Calendar Call, Diagonal Call, Calendar Put , Diagonal Put, and Covered Put (also known as Married Put).
Chapter 4: Volatility Strategies. These strategies use spreads that are indifferent to the direction of the price, as long as the price explodes out of range. For a given explosion in price, the volatility of the spread must rise for a Net Debit spread and fall for a Net Credit spread. There are 11 types of spread defined in this category: Straddle, Strangle, Strip, Strap, Guts, Short Call Butterfly, Short Put Butterfly, Short Call Condor, Short Put Condor, Short Iron Butterfly and Short Iron Condor.
Chapter 5: Lateral strategies. These strategies involve non-directional spreads, which require the price to deviate within a limited range. As the price remains within the range, the volatility of the spread should increase for a Net Debit spread and fall for a Net Credit spread. There are 11 types of spreads in this category: Short Straddle, Short Strangle, Short Guts, Long Call Butterfly, Long Put Butterfly, Long Call Condor, Long Put Condor, Modified Call Butterfly, Modified Put Butterfly, Long Iron Butterfly, and Long Iron Condor.
Chapter 7: Synthetic Strategies. Synthetic strategies mimic the risk profile of a stock, futures, or other option position by combining call, put, or stock options. Although normally, most synthetic positions are long or short stocks. If you have a 401K plan or employee stock purchase plan that are long stocks, then it may make sense to consider synthetic strategies, as it is already a long Delta. There is unlimited risk for some synthetic spreads, regardless of whether the strategy involves stocks or not. There are downsides to using synthetics. In this category, 12 types of spreads are defined: Collar, Synthetic Call, Synthetic Put, Synthetic Long Call Straddle, Synthetic Long Put Straddle, Synthetic Short Call Straddle, Synthetic Short Put Straddle, Long Synthetic Future, Short Synthetic Future, Long Combo, Combo short and long box.
From a retail options trader’s point of view, I prefer to establish positions without the use of stocks. Using stocks synthetically in one position makes each trade more capital intensive than necessary. Especially if your trading account is below $ 50,000. The use of stocks in setting up these positions does not add material merit in controlling risk and there is no additional monetary benefit to immobilizing available trading capital in a synthetic stock-dependent position that could otherwise be achieved without the use of Actions. As an options trader, you first want to have as little relationship as possible to the stocks themselves, apart from setting up the required option position around the underlying product, which can be substituted for a cash-settled index rather than a stock. Established index.
Out of a total of 56 strategies covered in the book, I have narrowed the list down to 35 types of limited risk spread that do not need to include stocks as part of their original construction. Limited risk means that there is a limit to the maximum loss; “Limited risk” is the term used in the book. This should always be the starting point for whatever strategy you choose to build. Don’t just look at the unlimited profit (No Limit Reward) side of the strategy without realizing that there is an unlimited loss (No Limit Risk) side to the same strategy.
Limited Risk Spreads with “Unlimited” Reward and Your Directional Outlook.
1. Long call. Bullish.
2. Long laying. Bearish.
3. Set the rear ratio margin. Bearish; bullish reverse.
4. Back spread call coefficient. Bullish; Reverse bearish.
5. Ride astride. Indifferent / – Neutral.
6. Strangle. Indifferent / – Neutral. 7. Get naked. Bearish.
8. Belt. Bullish.
9. Guts. Indifferent / – Neutral. 1-9 are debit spreads: IV must increase.
10. Bull Put Ladder. Bearish. 10-11 are credit spreads: IV must fall.
11. Bear call ladder. Bullish.
Limited Risk Limited Reward Spreads and Your Directional Perspective.
12. Bear Put Spread. Bearish.
13. Spread of the bullish call. Bullish.
14. Long call schedule. Bullish; Indifferent / – Neutral.
15. Long placement schedule. Bullish; Indifferent / – Neutral.
16. Long call butterfly. Indifferent / – Neutral.
17. Long butterfly set. Indifferent / – Neutral.
18. Long box. Indifferent / – Neutral.
19. Long Call Condor. Indifferent / – Neutral.
20. Condor Long Put. Indifferent / – Neutral.
21. Long iron butterfly. Indifferent / – Neutral.
22. Long iron condor. Indifferent / – Neutral. 12-22 are debit spreads: IV should increase.
23. Bear call propagation. Bearish. 23-35 are credit spreads: IV must fall.
24. Bull Put Spread. Bullish.
25. Short iron butterfly. Indifferent / – Neutral.
26. Short Iron Condor. Indifferent / – Neutral.
27. Diagonal call. Bearish.
28. Diagonal Put. Bullish.
29. Modified call butterfly. Bearish to – Neutral.
30. Modified put butterfly. Bullish to – Neutral.
31. Short put (naked). Bullish.
32. Short call butterfly. Indifferent / – Neutral.
33. Short call condor. Indifferent / – Neutral.
34. Short placement butterfly. Indifferent / – Neutral.
35. Short put condor. Indifferent / – Neutral.
Aside from the 35 defined risk spreads that do not require actions as part of their original construction for entry, there are 6 defined risk spreads that require actions to set up their positions. The 6 positions that I have deliberately excluded from the list above are: Long Call Synthetic Straddle, Long Put Synthetic Straddle, Synthetic Call, Synthetic Put, Collar, and Covered Call.
In conclusion, new to intermediate traders don’t get overwhelmed by the 56 strategies in the book. It’s titled the “Options Strategy Bible” for a reason. What is critical is to get a deep understanding of the long call option, the long call option, the short call option, the short put option, the vertical long call / put option, the short call / put option. vertical and long calendar call / put option. Those are the 4 Basic Option Strategies, plus the Vertical and the Calendar, the only 2 strategies that floor traders define as true spreads. The other combinations are a mix of the basics with or without broth.