August Book Review: Proven Option Spread Trading Strategies
I know I promised all of you an in-depth look at Hillary Clinton’s economic plan today. The same type of in-depth criticism that I gave Donald Trump in Part 1 (tax reform) and Part 2 (his overall economic plan). Fear not, you will get that critical analysis. However, for those two articles I wrote nearly 5,000 words and spent about 15 hours on research and writing. It was taxing. Plus, I don’t want to burn you all out by throwing another 5,000-word article at you. That’s a lot to expect of casual readers. Thus, I have decided to expedite one of the articles on the back burner – the August book review!
For August (okay, more like August and July), I read “Proven Option Spread Trading Strategies” by Billy Williams. I’ve been a stock trader for a long time, and I even traded on options a bit in college. However, while I’ve known about the different spreads, the only ones I’ve really ever traded was a covered call and the occasional bull call or bear put spreads. It may help to have some terminology explained right now. An option is a trade that gives you the right, but not the obligation, to buy or sell an underlying asset. A ‘call’ is when you buy and a ‘put’ is when you sell. A spread is the buying of two options on the same asset that have differing expiration dates (horizontal spread) or strike prices (vertical spread) or both (mixed spread).
Spreads are generally seen as a more consistent way to make money trading stocks because you’re minimizing risk and increasing the probability of a successful trade. However, as with any foray into trading securities, no trade is exempt from risk and you should not trade on money you’re not willing to lose.
August Book Review
This is a beginner’s book for option trading, but it’s still not meant for someone who isn’t comfortable with financial lingo. If you’re not familiar with reading financial statements and evaluating a stock, I would recommend starting there first. Otherwise, this will be a very confusing read.
That said, this was a great introduction to the mechanics of options. If you’re like me and familiar with options, but not the idea of option spreads, you can probably skip the first three chapters. In those chapters he discusses what options are and are not, and also explains what options seek to advantage of – namely volatility. Chapter four is where he gets into the meat and potatoes. In this chapter he describes the different option spreads. He starts with their name, a brief overview of the trade, how to make the trade (which options to buy), and then describes the nature in how this trade would make money.
Chapter four makes up a large portion of the book, which I honestly think is a good thing. Understanding the different spreads and when they’re applicable is a large part of successful trading.
From there the book goes into a very brief introduction to technical analysis – technical analysis is the use of metrics and trendspotting to decide your trades – which seems silly considering the volumes of knowledge that is technical analysis. His next chapter is his thought process for setting up a trade and then talks about the risk management that option spreads provide.
What I liked
The book is a short read at 160 pages. But in just a few pages, the author really does hone in on some very useful tools and strategies. I really like the fact that he takes so much time to explain the various spread types, because for a common investor they seem intimidating. It can be frustrating trying to decipher your iron butterfly’s and condors from your short butterfly’s and condors. But wait, what about ladders and strangles? And how do you reverse a butterfly? It’s almost like Wall Street picked a bunch of names out of an animal hat just to confuse people. Because explaining the spread types takes up so much of the book, it’s important that the author gets it right.
The language used makes this an easy read too. It doesn’t use superfluous words that obfuscate the salient meaning. Rather, the author breaks down a complex topic into manageable chunks that are easy to digest.
What I Didn’t Like
The portion on technical analysis seemed silly. I suppose for someone wholly unfamiliar with the two schools of thought in stock analysis, it might be useful. However, those type of people should not be trading spread options. Once you learn the basics of stock analysis, you’ll likely just come across technical and fundamental schools of thought.
I also was a little frustrated by the typographical errors. As a blog writer, I understand making a mistake. I’m not immune to these issues. However, this was a published book. I can overlook one, two, maybe even three. But this had a number of errors that became distracting the more you read.
Amazon sells the featured book in the August book review for $14.97. That’s a little much for what it provides I think. I was fortunate to buy it on a sale so I paid a great deal less. If you found this book for somewhere in the area of $9 or $10, I would say go ahead and grab it. It will be a convenient little reference for you to use as you begin option trading.
I’ve also used this book as an informative guide and then gone out and executed those option strategies to get a better feel for how they work. Again though, I’m an experienced trader and have moderate knowledge of options. I encourage everyone to take charge of their financial future, but only in ways that make sense. If poring over financial statements, and technical indicators constitute a “good time” then I would stick to your guns and do more passive investing through low-cost funds.
Readers, are you interested in reading the book? Have you ever wanted to trade options or option spreads? Be sure to like the Cash Flow Celt Facebook page. If you’d like to read the other book reviews, check out last month where I reviewed Outliers by Malcolm Gladwell. Before that I looked at CFO Techniques by Marina Guzik. Check them out too!