Books on Options Trading

[Laissez Faire]

Actually I started with Lee Lowell's Get Rich With Options, then McMillan. Lowell is good for someone new to and knows nothing about options for it is very simple and easy to understand. His chapters on spreads and buying DITM options were eye opener for me. I stopped mechanically trading covered call and CSP after I read his book.

I read McMillan from beginning to end several times, bought and worked on the Study Guide. My complains on McMillan is it is only descriptive, lists the various strategies but without really getting into the guts of how to trade each strategy and why.

I have not finished Hull yet. I read all the chapters on options but none of the other derivatives yet. It is a step above McMillan IMHO because it gave me a deeper understanding of the behaviors of options and the relationships with the underlying.

If you have to pick one, get Hull.

Thanks, ironchef.

I may order both then, but will probably follow your advice and start with Hull. FWIW, I'm mostly interested in options on indices at the moment and seeing if I can use options to exploit my understanding/predictions of the index (SPX) beyond directional day trading. Currently looking into weekly plays.

Best regards.

 

[El OchoCinco]

I still think HULL is too academic and used mainly in Master and upper level undergrad derivatives classes where you look at Black-Scholes and study the complex math of derivatives. If you are looking to understand how options work and trading them from a more practical standpoint, I think for most of you Hull will be a dull and dry read with no assistance. Hull has one chapter on strategies and they are basically vanilla descriptions.

If you are working for a firm and will do pricing of derivatives or be asked to understand Ito's Lemma and the derivation of B-S, then have a blast. If you are sitting in front of a screen and option chain to trade direction or ranges then Hull will waste a lot of your time.

Look for books that describe how options function and how they are priced in layman's terms, good understanding of IV and basic idea of the greeks to know the risk factors. The rest is commentary.

 

[ironchef]

I still think HULL is too academic and used mainly in Master and upper level undergrad derivatives classes where you look at Black-Scholes and study the complex math of derivatives. If you are looking to understand how options work and trading them from a more practical standpoint, I think for most of you Hull will be a dull and dry read with no assistance. Hull has one chapter on strategies and they are basically vanilla descriptions.

If you are working for a firm and will do pricing of derivatives or be asked to understand Ito's Lemma and the derivation of B-S, then have a blast. If you are sitting in front of a screen and option chain to trade direction or ranges then Hull will waste a lot of your time.

Look for books that describe how options function and how they are priced in layman's terms, good understanding of IV and basic idea of the greeks to know the risk factors. The rest is commentary.

Totally agree except the last paragraph. In a way it is like solving a mechanical engineering problem by reading up on and try to understand Newton's laws. Sometimes to breakthrough you need to really really understand Newton's laws.

The option space is extremely competitive, as an amateur retail, I will never be able to, or have the tools, to trade microstructures and win against you professionals. To survive, I had to find some obscured structures to trade and I found them in Hull, nothing earth shaking, but enough bread crumbs for this amateur to peck on and survive.

Best regards,

 

[El OchoCinco]

Totally agree except the last paragraph. In a way it is like solving a mechanical engineering problem by reading up on and try to understand Newton's laws. Sometimes to breakthrough you need to really really understand Newton's laws.

The option space is extremely competitive, as an amateur retail, I will never be able to, or have the tools, to trade microstructures and win against you professionals. To survive, I had to find some obscured structures to trade and I found them in Hull, nothing earth shaking, but enough bread crumbs for this amateur to peck on and survive.

Best regards,

If you are trading retail first of all you dont have to win against professionals. You are not trading directly against them nor are they batting 1.000.

If you are good at analyzing stocks and price charts you can make money putting on directional and non-directional trades using options and the Greeks to select most optimal strategies. HULL will not make you a better trader unless you are trading an institutional book of positions.

There is this myth that you are going 1 v 1 with pros and can only make money if you beat them. If I go long AMZN and you go long AMZN we both make money, you don't have to beat me to make money.

 

[ironchef]

If you are trading retail first of all you dont have to win against professionals. You are not trading directly against them nor are they batting 1.000.

If you are good at analyzing stocks and price charts you can make money putting on directional and non-directional trades using options and the Greeks to select most optimal strategies. HULL will not make you a better trader unless you are trading an institutional book of positions.

There is this myth that you are going 1 v 1 with pros and can only make money if you beat them. If I go long AMZN and you go long AMZN we both make money, you don't have to beat me to make money.

Appreciate the encouragements.

As for your example, if we both go long AMZN, we are not competing, we likely both trade against the mm, my definition of a professional. You say the pros hedge their position by e.g. buying some futures/underlying or balancing their positions. But then the fellow who sold him the future/underlying loses.... Eventually someone will not have a chair when the music stops.

 

[El OchoCinco]

Appreciate the encouragements.

As for your example, if we both go long AMZN, we are not competing, we likely both trade against the mm, my definition of a professional. You say the pros hedge their position by e.g. buying some futures/underlying or balancing their positions. But then the fellow who sold him the future/underlying loses.... Eventually someone will not have a chair when the music stops.

What a market maker does or some other pro does is useless to ponder. Make your trade correctly. If you go long on Amzn via stock or options and stock goes up you makemoney no matter what pros out there are doing.

Too much emphasis or fear of having to compete with a pro rather than simply making money.

If you are correct on direction magnitude and time with options you make money. What a pro or MM is doing out there has no effect on your own trades so best advice is stop thinking you have to battle some beast. If you lose.money on a position then you were wrong about either direction, magnitude or time and maybe vols , not because a pro came in and took your money.

 

[ironchef]

What a market maker does or some other pro does is useless to ponder. Make your trade correctly. If you go long on Amzn via stock or options and stock goes up you makemoney no matter what pros out there are doing.

Too much emphasis or fear of having to compete with a pro rather than simply making money.

If you are correct on direction magnitude and time with options you make money. What a pro or MM is doing out there has no effect on your own trades so best advice is stop thinking you have to battle some beast. If you lose.money on a position then you were wrong about either direction, magnitude or time and maybe vols , not because a pro came in and took your money.

Can't argue with that, except:

1. The prices of the options are established by the market makers and the "market". To make money, I must be right and they must be wrong with the pricing of the options!

2. If I am net profitable, I am more right than the market makers? Can they be wrong that often? Wow, something just doesn't add up!

 

[El OchoCinco]

Can't argue with that, except:

1. The prices of the options are established by the market makers and the "market". To make money, I must be right and they must be wrong with the pricing of the options!

2. If I am net profitable, I am more right than the market makers? Can they be wrong that often? Wow, something just doesn't add up!

I think you are going about this all wrong. You are not trading to accurately price the options and the MM misprice options constantly. If they were accurately priced, no one would trade them. NO One can accurately price options and if they did the price would be wrong an instant later as time, vols, the underlying all changed.

If you think you need to sit there and accuratey price options to make money then I can see where your struggles come from.

I trade vol skews and directional and non directional. It has ntohing to do with market making pricing or beating them, it is about making money.

 

[Wheezooo]

1. The prices of the options are established by the market makers and the "market". To make money, I must be right and they must be wrong with the pricing of the options!

2. If I am net profitable, I am more right than the market makers? Can they be wrong that often? Wow, something just doesn't add up!

Tricky question. You are partly correct because the market maker is representing fair value, the market. So yes, over the long haul, to win you need to beat the market. But that's kinda a universal truth of trading.

Now, the partly incorrect is because of that 3rd party ya kinda unfairly added into the zero sum argument. You sell a put to a MM, he hedges it, and two minutes later news comes out that sends the market off on its biggest rally of the decade. Both of you win.

 

[destriero]

Can't argue with that, except:

1. The prices of the options are established by the market makers and the "market". To make money, I must be right and they must be wrong with the pricing of the options!

2. If I am net profitable, I am more right than the market makers? Can they be wrong that often? Wow, something just doesn't add up!

1) You can trade at an edge loss and still earn, albeit less due to edge loss, being right on direction or vola. MMer can have an edge on price and hedge (better) dynamically and earn. Two entirely different business models.

2) No. MMers are generally price-neutral, locally. You can be right on vol (MMer "wrong") and wrong on price, and vice versa, and still earn. The MMers edge may exceed his vegfa exposure, again, locally.