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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 turn to mathematical formulas to define the construction of a spread. Guy Cohen chose to use pictorial logic, even with Greeks peculiar to a particular strategy, to piece together the legs of a spread with diagrams.

Diagrams that connect to each other are a much more intuitive way to learn for those less inclined to numerical formulas. Yet the logic of mathematics remains robust and intact.

The layout of the book facilitates navigation in the text. In addition to the strategies listed by chapter and page, there is a reference to the main strategy category with sub-categories, which are:

• Direction: bullish, bearish and neutral direction.
• Volatility: High volatility and low volatility.
• Risk/Reward: Capped Risk, Uncapped Risk, Capped Reward, and Uncapped Reward.
• Type: income and capital gain.

Guy Cohen has extensive experience in derivatives and equity markets in the US and UK. He specializes in trading and analytical applications ranging from real estate to derivatives and has developed comprehensive trading, trading and training models, all expressly designed for maximum usability.

There are adequate reader reviews on Amazon and Google Book Search, to help you decide if you’ll get the book. For those who have just started or are about to read the book, I have summarized the basic concepts in the most important and 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. Percentages represent each chapter’s share of the total 302 pages, excluding 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 for stock and options 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. Here are the key points from these thematic chapters, which I summarize 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 within a shorter timeframe (usually 30-45 days), to collect revenue. 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, Short (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 (aka Married Put).

Chapter 4: Volatility Strategies. These strategies use spreads that are indifferent to price direction, as long as the price breaks out of the range. For a given price explosion, spread volatility must increase for a Net Debit spread and decrease 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, causing the price to drift within a confined range. As the price remains bound to the range, the volatility of the spread should increase for a net debit spread and fall 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 option position by combining call, put, with or without stock options. Although generally, most synthetic positions are long or short stocks. If you have a 401K plan or employee stock purchase plan that is long in stock, it may be a good idea to consider synthetic strategies, since you are already long on Delta. There is unlimited risk for some synthetic spreads, whether or not the strategy involves stocks. There are downsides to using synthetics. 12 types of spreads are defined in this category: Collar, Synthetic Call, Synthetic Put, Long Call Synthetic Straddle, Long Put Synthetic Straddle, Short Call Synthetic Straddle, Short Put Synthetic Straddle, Long Synthetic Future, Short Synthetic Future, Long Combo, Short Combo and long box.

From the perspective of a retail options trader, I prefer to establish positions without using stock. The synthetic use of stocks in a position makes each trade more capital intensive than it should be. Especially if your trading account is below 50,000 USD. The use of stocks in setting up these positions adds no material merit in controlling risk and there is no additional monetary benefit to tying up available trading capital in a synthetic stock-dependent position that might otherwise be obtained without the use of shares. As an options trader, you first want to have the least amount of things to do with the stock itself other than setting up the required option position around the underlying commodity, which can be replaced by a cash-settled index instead of a stock. Index established.

From a total of 56 strategies covered in the book, I’ve narrowed the list down to 35 limited-risk spread types that don’t need to include equities as part of their original construction. Limited risk means there is a cap to the maximum loss – “Capped 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 (uncapped reward) side of the strategy without realizing that there is an unlimited loss (uncapped risk) side to the same strategy.

Limited risk spreads with “unlimited” reward and their directional outlook.

1. Long call. Bullish.

2. Put long. Bearish.

3. Put the Spread Ratio Back. Bearish; reverse bullish.

4. Call Ratio Backspread. Bullish; reverse bearish.

5. Overlap. Indifferent/ – Neutral.

6. To strangle. Indifferent/ – Neutral. 7. Tape. Bearish.

8. Strap. Bullish.

9. Guts. Indifferent/ – Neutral. 1-9 are flow deviations: IV must increase.

10. Bull Put Scale. Bearish. 10-11 are credit spreads: IV must go down.

11. Bear call scale. Bullish.

Limited risk spreads with limited reward and their directional outlook.

13. Spread of bullish calls. Bullish.

14. Long Call Schedule. Bullish; Indifferent/ – Neutral.

15. Long term schedule. Bullish; Indifferent/ – Neutral.

16. Butterfly long call. Indifferent/ – Neutral.

17. Butterfly long set. Indifferent/ – Neutral.

18. Long box. Indifferent/ – Neutral.

19. Long-call condor. Indifferent/ – Neutral.

20. Condor long bet. Indifferent/ – Neutral.

21. Long iron butterfly. Indifferent/ – Neutral.

22. Long Iron Condor. Indifferent/ – Neutral. 12-22 are flow deviations: IV must increase.

23. Bear Call Spread. Bearish. 23-35 are credit spreads: IV must go down.

25. Short Iron Butterfly. Indifferent/ – Neutral.

26. Short Iron Condor. Indifferent/ – Neutral.

27. Diagonal call. Bearish.

28. Place diagonally. Bullish.

29. Modified call butterfly. Bearish to – Neutral.

30. Modified updated butterfly. Bullish to – Neutral.

31. Short Put (naked). Bullish.

32. Short Call Butterfly. Indifferent/ – Neutral.

33. Condor Short Call. Indifferent/ – Neutral.

34. Short butterfly. Indifferent/ – Neutral.

35. Short Put Condor. Indifferent/ – Neutral.

Besides the 35 defined risk spreads that do not require stock as part of their original construction to enter, there are 6 defined risk spreads that require stock to set up their positions. The 6 positions that I deliberately excluded from the list above are Long Call Synthetic Straddle, Long Put Synthetic Straddle, Synthetic Call, Synthetic Put, Collar and Covered Call.

In conclusion, for beginner to intermediate traders, don’t be overwhelmed by the 56 strategies in the book. It’s called the “Bible of Options Strategies” for a reason. What is essential is to have a thorough understanding of Long Call, Long Put, Short Call, Short Put, Long Vertical Call/Put, Short Vertical Call/Put and Long Calendar Call/Put . These are the 4 basic options strategies, plus the vertical and the calendar – the only 2 strategies that traders define as true spreads. The other combinations are a mix of the basics with or without stock.

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