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HOW TO USE YOUR HUMAN ADVANTAGE TO OUTPERFORM ALGORITHMS IN THE OPTIONS MARKETIf you're a value investor who wants to get your money into the lucrative options market, forget about day trading, chart patterns, and market timing. This systematic book lays out a path to long-term wealth by taking positions on companies with real intrinsic value--the kind Ben Graham and Warren Buffett would invest in.
Leave the complex algorithms and "Greeks" for the floor traders. Erik Kobayashi-Solomon, former investment banker, hedge fund risk manager, and valuation consultant to the World Bank, gives you the knowledge and sophisticationto understand what options pricing reveals about the market's estimation of future stock prices. He then demonstrates how to find tremendous opportunity for low-risk, high-profit investments in the difference between the market's mechanized price ranges and ones madeby you, a thoughtful human being armed with the insight this book offers.
Everything you need to make options a powerfulcontributor to your portfolio is inside, including:
A thorough explanation of what options are and what their prices can tell you about the market's expectations for the future price of a stockA proven way to envision the risk/reward trade-off for stocks and options and a straightforward method to use theflexibility and directionality of options to tilt the risk/return balance in your favorA robust and intuitive framework for assessing the value of a companyStrategies to avoid the most common behavioral pitfallsTips for using the information on an option-pricing screenThorough coverage of important option investment strategies, including "covered calls," "protective puts," and "collars"
Regardless of your experience level with options, this versatile guide makes you a better investor. Beginners get a turnkey solution to growing wealth in options, experienced investors gain savvy guidance for fine-tuning their practices, and professional investors learn how to effectively incorporate options into a portfolio.
Understanding valuation in this perceptive light lets you earn the consistent profi ts of The IntelligentOption Investor.
The Intelligent Option Investor is the hands-on guide to using a cuttingedge valuation framework in the fast-paced options market to boost growth, protect gains, and generate income.
It explains how to use your insightful human mind to recognize when mechanized options pricing undervalues a stock. Once you see an opportunity, you'll have all the tools you need to execute a fact-based decision about how and when to invest in the company.
Have your money make the most for you with the potent blend of timehonored value investing strategies and hot options vehicles in The Intelligent Option Investor.
PRAISE FOR THE INTELLIGENT OPTION INVESTOR:"The Intelligent Option Investor reflects Erik's keen understanding of how companies create value for their owners, which is essential to successful option investing. In addition to showcasing Erik's expertise in developing option investment strategies based on fundamental security analysis and a long-term time horizon, this book delivers the information in a way that's accessible to individual investors, offering them the resources to use options to help them meet their financial goals." -- JOE MANSUETO, founder, chairman, and CEO, Morningstar, Inc.
"Erik knows--and lays out here--that to use options successfully, you need to understand the underlying stock and its valuation first. This is one of few books onoptions that teaches this fruitful, combined approach. And that's why it works." -- JEFF FISCHER, advisor, Motley Fool Options
Contents
Acknowledgments xiIntroduction xiiiPart I: Options for the Intelligent Investor Chapter 1: Option Fundamentals 3Characteristics and History 4
Directionality 9
Flexibility 20
Chapter 2: The Black-Scholes-Merton Model 29The BSM's Main Job is to Predict Stock Prices 30
The BSM is Lousy at Its Main Job 39
Chapter 3: The Intelligent Investor's Guide to Option Pricing 49How Option Prices are Determined 50
Time Value versus Intrinsic Value 56
How Changing Market Conditions Affect Option Prices 59
Part II: A Sound Intellectual Framework for Assessing Value Chapter 4: The Golden Rule of Valuation 77The Value of an Asset 78
Cash Flows Generated on Behalf of Owners 80
The Company's Economic Life 82
Time Value of Money: Summing Up Cash Flows Over Time 87
Chapter 5: The Four Drivers of Value 91Bird's Eye View of the Valuation Process 91
A Detailed Look at the Drivers of Value 97
Chapter 6: Understanding and Overcoming Investing Pitfalls 113Behavioral Biases 114
Structural Impediments 131
Part III: Intelligent Option Investing Chapter 7: Finding Mispriced Options 143Making Sense of Option Quotes 144
Delta: The Most Useful of the Greeks 151
Comparing an Intelligent Valuation Range with a BSM Range 155
Chapter 8: Understanding and Managing Leverage 163Investment Leverage 164
Simple Ways of Measuring Option Investment Leverage 169
Understanding Leverage's Effects on a Portfolio 174
Managing Leverage 183
Chapter 9: Gaining Exposure 187Long Call 189
Long Put 201
Strangle 205
Straddle 208
Chapter 10: Accepting Exposure 211Short Put 212
Short Call (Call Spread) 220
Short Straddle/Short Strangle 230
Chapter 11: Mixing Exposure 233Long Diagonal 235
Short Diagonal 238
Covered Call 240
Protective Puts 248
Collar 258
Chapter 12: Risk and the Intelligent Option Investor 263Market Risk 263
Valuation Risk 265
Intelligent Option Investing 267
Appendix A: Choose Your Battles Wisely 269Where the BSM Works Best 269
Where the BSM Works Worst 273
Appendix B: The Many Faces of Leverage 282Operational Leverage 282
Financial Leverage 285
Appendix C: P ut-Call Parity 287Dividend Arbitrage and Put-Call Parity 288
Notes 295Index 305
