Spread Trading: An Introduction to Trading Options in Nine Simple Steps (Wiley Trading)

A proven,easy-to-understandmethod for makingmoney with options “If you’ve never invested in the stock market,this is the book for you. If you’ve been investingfor years . . . this is still the book for you. A fantastic introduction to options.”
—Jon “DOCTOR J” Najarian, Co-founder, OptionMonster.com Spread trading-the practice of combining optiontrades and adjusting them over time-is being used successfullyby more and more professional traders. In this book, Greg Jensensho

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#1070
Aidan McDowell :
Aug 11, 2010 8:59 am |

Review by Aidan McDowell for Spread Trading: An Introduction to Trading Options in Nine Simple Steps (Wiley Trading)
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What this book does, it does very well indeed. And what it does is offer a relatively painless, yet accurate, introduction to option trading. But it’s only a introduction. By no means does it equip the reader to go out and start trading options. There’s more, much, much more, to the story than you’ll learn in this book.

There are several phases to option study, even before one begins to do paper trades. First of all, you’ve got to learn the terminology and the fundamentals. This book handles this very well. The author, unlike most who want to be teachers, remembers what it’s like to be a student. Most “beginner’s” books out there fall short because much of the time the author is talking to himself. Being able to hypothetically “forget” what you know and retrace the steps you took to get where you are is a rare skill, and one that few can master. There’s a profound difference between knowing-how and knowing-that. It’s much like learning a new language. A native speaker of French, for example, may know very little of French grammar, but he has a “feel” for his native tongue that a non-native speaker will never have, or, at best, will acquire only with much experience. The learner must rely on various “crutches”–like grammar books and various other teaching aids. The same is true of option trading, or any other skill. This book introduces and uses such crutches very skilfully, so that you don’t even know you’re using them.

The second phase of learning options is learning the basic strategies. In order to do this well, you MUST learn how to construct a graph which shows the position of the option trader at expiration. And in order to do this, you MUST know how to construct a profit-loss chart. The profit-loss chart defines an option position. Once you have the chart, you can easily construct the graph. There are six basic moves in options trading, and any strategy, however complex, comprises one or more of them: long stock, short stock, long call, short call, long put, short put. When you open an option position, your profit-loss chart will include one or more of these basic moves, and define it for the facts you are given.

The third phase of learning options assumes you know the basic moves, and shows how they are combined into more complex strategies. To do this, you must learn basic synthetics, the put-call parity equation, maximum profit and loss, and several other concepts. And again, this presupposes that you know how to construct the profit-loss chart and from it, the graph for a given strategy. At this point, you’ll need to learn how to read option chains. Once you have a sound understand of synthetic positions, you can learn strategies such as covered calls, vertical spreads, and collars.

Now, before you go any farther, you enter the fourth phase, which is risk management, which is arguably THE MOST IMPORTANT part of options trading. Without a solid understanding of it, you will lose your shirt if you start doing live trades. If you do understand it, you’ll have losses, but they probably won’t empty your account. Risk management includes learning the option Greeks and volatility, the use of stop orders (if you think you need them), and chart reading (technical analysis), which, in the context of options trading, is one tool in your risk-management toolbox. For this knowledge, I’ve relied on the Pristine method, which has the advantage of simplifying what many others delight in making difficult. One good thing about options trading is that you don’t always have to be right on the direction of the underlying instrument, but it doesn’t hurt to be right. If you’re long, say, 100 shares of XYZ stock at 50, and the stock price goes above 50, you make money. If it falls below 50, you lose money. Option trading, once you understand certain strategies, opens a “window,” a range of prices of the underlying stock, and if the latter stays within that range, you’re good.

The fifth phase is learning how to actually place a trade. This means learning how to read bid and ask prices, and learning how market makers think. When you move out into the real world to trade, keep in mind that although you’re probably sitting at your computer, you’re not trading with a machine. If you’re buying, there are real people selling, and if you’re selling, there are real people buying. And they don’t want to lose money any more than you do. They want to make money, just as you do. Part of placing a trade is learning how to use an actual trade platform. I use Think-or-Swim which, for option trading, is very hard to improve upon. Once you’ve mastered the concepts in the first four phases of your study, you’ll find a wealth of information at their site to enhance your knowledge. And their tutorials will literally walk you through the platform, which, if you’re new to trading platforms, can be a daunting experience.

The sixth phase is paper trading. If you’ve ever taken a serious exam, you know the value of doing practice exams ahead of time. You know that IF YOU DON’T HAVE THE KNOWLEDGE AND SKILLS TO PASS THE PRACTICE EXAM, YOU WON’T HAVE THE KNOWLEDGE AND SKILLS TO PASS THE REAL ONE. The same is true of placing option trades (or any other kind of trades). When you’ve applied what you’ve learned doing paper trades, and have a consistent record of wins and losses that you can live with, only then should you start doing live trades. Now, I’d like to tell you that doing live trades is just like doing paper trades, but I can’t, because it’s not. There’s a different sense of reality when your own, real money is on the line. You can paper trade monopoly money all day long, and if you lose, you won’t take it too seriously (although you should).

For the first phase, I would recommend the book I’m reviewing, “Spread Trading.” It will take you through the basics, and even introduce you to some more advanced concepts, such as the Greek delta, volatility, and the four vertical-spread strategies. But again I emphasize, you’re only being introduced to them; the author’s coverage will make it easier for you to study the real stuff. One great strength of the book is that you learn early on how to read option chains. When you encounter them again later in your study, you’ll find it a breeze. What the book doesn’t cover at all is the essential profit-loss charts. And again, unless you know how to put them together and take them apart, you won’t be prepared for more in-depth study of the elements of risk management.

For the second and third phases, I would recommend the book “Options for the Stock Investor” by James Bittman. As I mentioned in my review of that book, the second chapter, “How Options Work,” will give you a solid understanding of profit-loss charts and graphs, and is itself worth the price of the book. For the fourth phase, I recommend “Trading the Option Greeks” by Dan Passarelli. I recently met him and listened to him lecture at an options expo in Las Vegas, and I must say that his approach is not only at a level of sophistication that you’ll need for real-life trading, but he’s also a fine teacher. For the fifth phase, I recommend “Trading Options as a Professional” by James Bittman. This book also covers phase 4 stuff very well, and you can integrate it with what you’re learning from Passarelli. For the sixth phase, go to the Think-or-Swim web site, and download the software. It’s now time for you to learn how to use the platform and begin paper trading. And their paper trading function is among the best out there. They also sponsor Option Planet, which consists of free lectures given at various times in different cities, and usually last six hours. Once you’ve gone through five of the six phases I’ve outlined, you’ll be a very good position to benefit from these lectures. The people from Think-or-Swim are all pros, and they don’t waste a lot of time explaining the rudiments. Even their most basic Option Planet seminar jumps in on the deep end.

All of this may seem tedious, and some will argue that you don’t have to be so systematic in order to learn options trading. Among them are (1) those who have already mastered the art, and have forgotten what it’s like to be a beginner; and (2) those who don’t know what they’re talking about. In truth, there are no shortcuts in learning how to trade options (or anything else, for that matter). One way or the other, you’ll pay. Either you’ll pay the price in time spent studying and practicing, or you’ll pay the market in losses. And once you’re account is depleted, your trading career is over. When your own money is at stake, then if option trading is worth doing at all, it’s worth doing right. And again, a very good place to start is with the book “Spread Trading.”
#1071
David R. Smith :
Aug 11, 2010 9:54 am |

Review by David R. Smith for Spread Trading: An Introduction to Trading Options in Nine Simple Steps (Wiley Trading)
Rating:
As someone who has read a great deal of options trading material, this book definitely stands out above the rest. By covering complex terminology and concepts in story format, Spread Trading delivers a unique reading experience for beginners. This book avoids the oft-repeated pitfall of many authors and instructors who try to teach options to those who are new: they have forgotten what it is like to be a beginner. The need-to-know material has been presented in a clear, easy to understand manner. I highly recommend this book to those looking for an introduction to options.
#1072
Nicholas W. Gorden :
Aug 11, 2010 10:52 am |

Review by Nicholas W. Gorden for Spread Trading: An Introduction to Trading Options in Nine Simple Steps (Wiley Trading)
Rating:
This was the first book I’ve read on option trading and I can’t say enough good things about it! Options have always intimidated me, but after reading even the first half of this book I realize it’s not as difficult as I once thought. The book is well writeen and includes reviews, questions and summaries to keep the reader engaged and putting into practice the content being taught. Two thumbs up go out to Greg Jensen for taking something perceived as being very difficut and making it easily understood for all who care to know!
#1073
Jeffrey Howard :
Aug 11, 2010 11:22 am |

Review by Jeffrey Howard for Spread Trading: An Introduction to Trading Options in Nine Simple Steps (Wiley Trading)
Rating:
Greg Jensen takes material that is complex and no one can say that spread trading is anything but yet he presents it in a clear and concise manner using Lon and Shorty (Long and Short) as his two main characters so it tells a story and a good one at that. I have read it cover to cover and am now going back and forth through the book as it is great material presented in a easy to read method that makes you want to take your paper trading to the next level. Remember practice practice practice before you trade real $$$$$
#1074
Arthur D. Babayev :
Aug 11, 2010 11:33 am |

Review by Arthur D. Babayev for Spread Trading: An Introduction to Trading Options in Nine Simple Steps (Wiley Trading)
Rating:
The Spread Trading words should be removed from the book title. You will not find much about spreads in this book, just few last chapters covering the very basics of spreads. The book is very basic and written in forms of dialogues between Lon & Shorty and other characters-like children book, which was very annoying to me. There is only theory, the very basics of options with no real trade examples, graphs etc… And there is very little and very basics about the spread trading. Do not expect to learn more then very basics of options from this book. The book should be put in teenagers section and priced accordingly. I felt like one while reading this book. If you want short and good intro to options I’d suggest Trading Stock Options by Brian Burns which is very well written with plenty of paper trade and real trade examples.