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Options Trading Strategies – Book Review – Guy Cohen, The Bible of Options Strategies
Most of the trading literature on options strategies tends to lean towards mathematical formulas to define the construction of a spread. Guy Cohen has chosen to use pictorial logic, even with Greeks unique to a particular strategy, to join the legs of an extension with diagrams.
Diagrams that connect to each other are a much more intuitive way to learn for those less inclined to numerical formulas. Even so, the logic of mathematics remains robust and intact.
The layout of the book facilitates navigation through the text. In addition to the strategies listed by chapter and page, there is a reference to the main strategy category with subcategories, which are:
- Skill: Beginner, Intermediate, Advanced and Expert Trader.
- Direction: bullish, bearish and neutral direction.
- Volatility: high volatility and low volatility.
- Risk/Reward: Limited Risk, Unlimited Risk, Limited Reward and Unlimited Reward.
- Type: Income and capital gain.
Guy Cohen has extensive experience in both derivatives and the US and UK equity markets. It specializes in trading 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 good reader reviews on Amazon and Google Book Search to help you decide whether to get the book. For those just starting out or about to read the book, I’ve broken down the basics into larger, more essential chapters to help you get through them faster.
The number to the right of the chapter title is the number of pages contained in that chapter. It is not the page number. The percentages represent how much each chapter makes up of the 302 pages in total, not including the appendices.
1. The four basic options 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. Leverage strategies. 20, 6.62%. 7. Synthetic strategies. 54, 17.88%. 8. Taxation of stock and option traders. 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 of these focus chapters, which I am summarizing from the perspective of a retail options trader.
Chapter 2: Income strategies. These strategies build spreads where part of the spread sells Theta as a premium in a shorter term (typically 30-45 days), to collect income. 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, 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 price direction, as long as price explodes out of range. For a given price breakout, spread volatility must rise for a net debit spread and fall for a net credit spread. There are 11 spread types 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 move within a limited range. As the price remains in the range, the volatility of the spread must increase for a net debit spread and decrease 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 options position by combining calls, puts with or without stocks. Although typically, most synthetic positions are either long or short stocks. If you have a 401K plan or employee stock purchase plan that is long, it may make sense to consider synthetic strategies since you already have a long Delta. There is unlimited risk for some synthetic spreads, regardless of whether the strategy involves stocks or not. Using synthetics has disadvantages. 12 spread types are defined in this category: Collar, Synthetic Call, Synthetic Put, Long Call Synthetic Straddle, Long Put Synthetic Straddle, Short Call Synthetic Straddle, Short Exit Synthetic Straddle, Long Synthetic Future, Short Synthetic Future, Long Combo, Short Combo and Long Box.
From a retail options trader’s point of view, I prefer to establish positions without using stocks. Using stocks synthetically in a position makes each trade more capital intensive than it needs to be. Especially, if your trading account is less than 50,000 USD. The use of stocks in setting up these positions adds no material merit in risk control and there is no added monetary benefit in tying up available trading capital in a synthetic stock-dependent position than otherwise could be achieved without the use of shares. As an options trader, you first want to do as little as possible with the stock itself, other than setting up the necessary option position around the underlying product, which can be replaced by a cash-settled index in instead of an asset. established index.
From a total of 56 strategies covered in the book, I’ve whittled the list down to 35 types of limited-risk spread that don’t 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 any strategy you choose to build. Don’t just look at the unlimited profit (Unlimited Reward) side of the strategy without realizing that there is an unlimited loss (Unlimited Risk) in the same strategy.
Limited risk spreads with “unlimited” reward and their directional outlook.
1. Long call. bullish
2. Long pose. bass player
3. Put back the spread ratio. bass player; reverse bullish
4. Call Ratio Back spread. bullish; reverse bassist
5. On horseback. Indifferent/ – Neutral.
6. Strange. Indifferent/ – Neutral. 7. Pull bass player
8. Belt. bullish
9. Guts. Indifferent/ – Neutral. 1-9 are debit spreads: IV must increase.
10. Bull Put Scale. bass player 10-11 are the credit spreads: the IV must go down.
11. Bear call scale. bullish
Limited risk limited reward spreads and their directional outlook.
12. Os Posa Unta. bass player
13. Bull Call Spread. bullish
14. Calendar of long calls. bullish; Indifferent/ – Neutral.
15. Long lay calendar. bullish; Indifferent/ – Neutral.
16. Long-billed butterfly. Indifferent/ – Neutral.
17. Long Put Butterfly. Indifferent/ – Neutral.
18. Long box. Indifferent/ – Neutral.
19. Long Call Condor. Indifferent/ – Neutral.
20. Long Put Condor. Indifferent/ – Neutral.
21. Long iron butterfly. Indifferent/ – Neutral.
22. Long iron condor. Indifferent/ – Neutral. 12-22 are debit spreads: IV must increase.
23. Dissemination of the call of the bear. bass player 23-35 are the credit spreads: the IV must go down.
24. Bull Put Spread. bullish
25. Short iron butterfly. Indifferent/ – Neutral.
26. Short iron condor. Indifferent/ – Neutral.
27. Diagonal call. bass player
28. Diagonal Pose. bullish
29. Modified call butterfly. Bearish in – Neutral.
30. Modified Put butterfly. Bullish to – Neutral.
31. Short pose (naked). bullish
32. Short Call Butterfly. Indifferent/ – Neutral.
33. Short call Condor. Indifferent/ – Neutral.
34. Butterfly with short perch. Indifferent/ – Neutral.
35. Short Condor. Indifferent/ – Neutral.
Apart from the 35 defined risk spreads that do not require stock as part of their original construction for entry, there are 6 defined risk spreads that require stock to set up their positions. The 6 positions I have deliberately excluded from the above list are: Long Call Synthetic Straddle, Long Put Synthetic Straddle, Synthetic Call, Synthetic Put, Collar and Covered Call.
In conclusion, for novice and intermediate traders you will not be overwhelmed by the 56 strategies in the book. It’s called the “Bible of Options Strategies” for a reason. What is critical is a thorough understanding of the long call, long put, short call, short sell, vertical put/long put, vertical call/short sell, and long calendar call/sell. These are the 4 basic option strategies, plus vertical and calendar, the only 2 strategies that floor traders define as real spreads. The other combinations are a mix of the basics with or without stock.
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