When we first started learning options we took what we define as the normal learning path. We started with a simple Google search on options trading and began to read....and read......and read. While we picked up a lot of great information it was only in small bits and pieces and it was very random. The great part about the web is that you can find information on any subject at the touch of a button. The bad part is that it is only on a certain segment in that subject and not the big picture. Who is going to write a 500 page blog post that encompasses all of options?
One of the best ways to start into a new subject is with a good book. Books have a better opportunity to give you the big picture on a subject. Not only do you get a lot of information but it is in a format that follows a learning path. A learning path is a guided journey through a subject making sure you learn everything in the correct order. A website full of blogs and articles causes you to jump around from one section to the next without a definable path. This is great if you need some quick information but horrible if you want to learn from start to finish.
Thanks to places like Amazon it is even easier to get that book into your hands. With hundreds and sometimes thousands of books on a single subject it can be difficult to figure out which of those is "good". What we have done is compiled a list of our top five favorite option trading books plus a bonus book at the end. Many of these books we have used ourselves as a learning source or a simple reference guide. There are a lot of moving parts with options so having a quick reference handy is always a necessity.
Option As A Strategic Investment by Lawrence McMillan
If you could only pick one book from this list to buy this would be the one you need to get. At over 1000 pages this book will be your options trading bible.
Here is the quick description:
The market in listed options and non-equity option products provides investors and traders with a wealth of new, strategic opportunities for managing their investments. This updated and revised Fifth Edition of the bestselling Options as a Strategic Investment gives you the latest market-tested tools for improving the earnings potential of your portfolio while reducing downside risk—no matter how the market is performing.
Written primarily for investors who have some familiarity with the options market, this comprehensive reference also shows you the concepts and applications of various option strategies -- how they work, in which situations, and why; techniques for using index options and futures to protect one’s portfolio and improve one’s return; and the implications of the tax laws for option writers, including allowable long-term gains and losses. Detailed examples, exhibits, and checklists show you the power of each strategy under carefully described market conditions.
This book is broken down into several important categories:
- Basic Properties Of Stock Options: This is your essential introduction to options covering definitions, symbology, order entry, and profit and loss graphs. It won't spend too much time on any one of these subjects but it does give you a good starting point.
- Call and Put Option Strategies: Lawrence McMillan doesn't waste any time jumping into option strategies. Each strategy has is its own chapter and each one gets its own personal touch. You won't find him talking about the same type of information for each strategy. He tailors the section and comments to fit the strategy. His descriptions are mostly unbiased and focus on telling you the most important information about each strategy.
- Additional Considerations: This section talks about the smaller subjects of options trading such as treasury bills, arbitrage, and mathematical applications.
- Index Options and Futures: This is an excellent section on how to trade index and future options and how to use them to hedge your portfolio.
- Measuring and Trading Volatility: Volatility is a huge part of options trading. We believe it is the most crucial aspect of options trading and a clear understanding of volatility will make you a great options trader. Unfortunately, Lawrence McMillan only touches on volatility, but we have other books that dive deeper into that part. Still, it is an excellent primer to get your feet wet and round out the understanding of options.
Options As A Strategic Investment aims to get you started in options trading. It spends the bulk of its pages focused on familiarizing you with the each of the options strategies and answering questions about those. It does a fantastic job at this part but fails to deliver on the more advance topics like volatility and the Greeks.
Option Volatility And Pricing by Sheldon Natenberg
After you have covered the basics, its time to explore more advanced topics and the best introduction to those is through Option Volatility and Pricing.
The quick description:
You'll learn how professional options traders approach the market, including the trading strategies and risk management techniques necessary for success. You'll gain a fuller understanding of how theoretical pricing models work. And, best of all, you'll learn how to apply the principles of option evaluation to create strategies that, given a trader's assessment of market conditions and trends, have the greatest chance of success.
Options trading is both a science and an art. This book shows how to apply both to maximum effect.
Sheldon Natenberg begins with the option pricing model and then moves into volatility and the Greeks. Volatility is a complicated topic, and Natenberg provides a great start as he breaks it down into easy to understand principals. He also covers more into spreads and specifically into volatility spreads. A volatility spread is a spread that is delta-neutral, sensitive to changes in the price of the underlying, sensitive to changes in implied volatility and sensitive to the passage of time.
The Option Trader's Hedge Fund by Mark Sebastian
Now that we've found the books we need for option basics and the more advanced topics lets drill down to some specifics. The Option Trader's Hedge Fund is a great book for running a short option portfolio. Don't let the title scare you away this is not geared towards hedge funds.
The short description:
In this book, a hedge fund manager and an option trading coach show you how to earn steady, reliable income selling options by managing your option trades and running your options portfolio as a real business with consistent, steady returns. Packed with real-world examples, the authors show you how to manage your own “one man” hedge fund and make consistent profits from selling options by applying the basic framework and fundamental business model and principles of an “insurance company.” This framework helps you to apply your option trading strategy to a solid, predictable, business model with consistent returns. For someone who has some knowledge of trading options and wants to become a consistent income earner.
Mark Sebastian details out the strategies used toe run a short option portfolio such as vertical spreads, iron condors, iron butterfly, time spreads and ratio spreads. He details out how to build a portfolio and run it like an insurance company (because selling option credit is like selling insurance). Packed with his experience from the trading floor you can see how market makers handle risk management, trade execution, and the Greeks.
Trading Options Greeks: How Time, Volatility, and Other Pricing Factors Drive Profits by Dan Passarelli
If you are going to be an options trader, you need to know your Greeks, and there is no better book than Trading Options Greeks: How Time, Volatility, and Other Pricing Factors Drive Profits. The Greeks are going to tell you how your option price moves as the underlying moves (delta), the passage of time (theta), volatility movement (vega), and the change in interest rates (rho).
A quick description:
The options market is always changing, and to keep up with it, you need the greeks—delta, gamma, theta, vega, and rho—which are the best techniques for valuing options and executing trades regardless of market conditions. In the Second Edition of Trading Options Greeks, veteran options trader Dan Pasarelli puts these tools in perspective by offering fresh insights on options trading and valuation.
An essential guide for both professional and aspiring traders, this book explains the greeks in a straightforward and accessible style. It skillfully shows how they can be used to facilitate trading strategies that seek to profit from volatility, time decay, or changes in interest rates. Along the way, it makes use of new charts and examples and discusses how the proper application of the greeks can lead to more accurate pricing and trading as well as alert you to a range of other opportunities.
Like Mark Sebastian, Dan Passarelli spent time on the floor, so his experience comes as a market maker. Dan starts off with the Greek basics but quickly moves into more advanced topics such as spreads, volatility and using the Greeks in your trading.
Options Trading: The Hidden Reality by Charles Cottle
Moving on with our advanced topics we are going right in with Options Trading: The Hidden Reality. We will be the first to admit that this book is going to be the more difficult one to get through. The writing will be harder to follow so a couple of passes through this book is necessary. However, we still recommend this book because it is going to cover a wider more abstract range of option topics. Charles deals with option synthetics, put-call parity, hybrid hedging and adjustments. The book teaches readers when an adjustment becomes necessary and which adjustment to go with. It helps to take the emotion out of trading and turn it into a more mechanical process.
Bonus Book: Learn Options eBook (free)
The Learn Options eBook is a great reference book to keep handy. Each option strategy is laid out in full detail. Now you can quickly turn the page and see the max profit, max loss, breakeven, margin requirements and profit and loss graph for each option strategy. It also talks briefly about the history of options so you have an idea of what you are working with and their origin. The book also moves into the more advanced topics such as the Greeks and volatility. One key reference point is the Greek Cheat Sheet laid out towards the back of the book. This is a great reference to have because it list each option strategy and the Greeks associated with it and how they affect the position.
What book has helped you with options? Let us know in the comments...