Name: Options as a Strategic Investment
ISBN: 9780735201972

What Hacker News says

nathanasmithMar 2021

Options as a Strategic Investment by Lawrence G. McMillan introduced me to the wonderful world of selling covered calls on my long term holds as well as many of the ins and outs of options wrangling in general.

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beezleJan 2021

Hull is a great book and is not too heavy on the math. However, for someone just getting their feet wet, Options as a Strategic Investment by MacMillan is a classic.

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001skyDec 2012

Something like "Options as a Strategic Investment" is probably the shallow end of the big pool of modern trading. Highly recommended. Others might disagree, and say its over-ambitious (without some technical chops).

http://www.amazon.com/Options-Strategic-Investment-Lawrence-...

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nirvanaOct 2012

You reached the correct conclusions empirically, but you could have saved a lot of time and effort by having the philosophy that would lead you to them. Or more specifically, an understanding of economics. I don't mean this to sound smug, or anything like that, I'm just saying that I went thru the same process you did- only I did it in 1998! and then because I didn't believe it, again in 2001. By 2001 I knew there would be a housing bubble, even though there were (at that time) no signs of one. Hell, 911 was the news at that time.

Some pointers to help you be able to make these kinds of predictions (and thus maybe look for better data for more interesting and profitable investments)--

The book "The creature from Jekyll Island" by G. Edward Griffen (?) is the history of money in america, the federal reserve, and the "bailout cycle" that happens over and over every 20 years. (And people act outraged at the "bailouts" in 2008, as if it hasn't happened dozens of times before.)

And "economics in one lesson" by henry hazlitt-- you can find a free copy of this out of copyright book online if you google around. A great overview of economics, starting from the premise of the broken window fallacy and how it illustrates why so many efforts that sound plausible totally fail (like keeping interest rates low and making banks loan money to people who can't repay - the Clinton and Bush policies that led to the housing bubble.)

Also the topical articles at http://mises.org are great and that site also has around 900 free economics books you can download.

I went the options-spreads on canadian junior mining companies route, and I got out of the market in the summer of 2007 when I felt the crash was imminent. (I was a year early, but for that kind of deal you don't worry about not nailing the absolute top!)

Spreads might be something good for you too-- "Options as a strategic investment", by McMillan is the bible. (Using spreads I get better returns at much less risk than people who buy stocks directly.)

Economics is a lot like programming- the basics are easy but there's no end to what you can learn, and it gives you such great power-- especially when the rest of the world has as much understanding of the science as the average person does of writing software-- essentially none. And, even better, the people who create economic opportunity for you telegraph what they are going to do years in advance- they campaign on it, even!

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nirvanaMar 2012

This is absolutely true. What I've found is that there isn't a silver bullet for this, and to mitigate it I use several techniques. One of them is, just don't pay attention to many stocks. Focus on specific stocks which offer the likelihood of outsized returns. PEG is just a quick check but Apple's growing at %70-%100 a year but trading usually under 15 times earnings making it a way to buy very high growth cheaply. Another method is to wait for the stock to be near its 200 day moving average. A third method is to phase your purchases of stock over a period of time. If you have $10,000 to invest, spend $2,000 a month on the stock... preferably when its at or near its 50 day moving average (or well below it if you get that chance.)

Also useful is to recognize that "high" and "low" will change depending on what time horizon you're looking at. Over 10 years, $580 is probably a really low price. Over 10 minutes, who knows.

I wouldn't buy common stock unless I planned to hold it for 5-10 years. For most people that's the way to approach it and buy these really stellar companies (you don't have to be in everything. Who knows if netflix is going to outperform everything on the market over the next 10 years or not. If you get a fantastic return from the stock you do invest in, its silly to kick yourself for not investing in the winner.)

I looked at Apple when it was $13 a share and said "Damn that's a good buy, they have $6 a share in pure cash." And I didn't buy. I didn't buy for a decade after that. I never thought Apple was a company I understood well enough, despite following the company for over 30 years at that point.

I made my first Apple investment in December 2011, around $380 or $390, and totally missed the bottom.

(Meanwhile in 2001, I knew there would be a housing bubble, placed myself to profit from it, knew it was going to burst and went short the housing market in 2007... a year early, but you don't complain about once in a lifetime setups like that.)

You're never going to time it perfectly-- I'm really proud of my 2007 discipline, to switch positions when every TV channel was screaming that I was wrong (actually one of the indicators that gave me confidence).

If I'd bought Apple at $14, and it had gone down to $10, was it a bad buy? With hindsight you can see it wasn't... the thing to nail is whether the company has a solid future. I didn't know when Apple was at $14, but I do know now. (And yes, they do. They've got a lot of growth and while Steve Jobs liked the term "magical" there's actually nothing magical about Apple at all. No special insight, no secret, just really solid execution and focusing on the right things. Any company could do it... the question is why they don't, not why Apple is able to do it.)

Finally, if you're willing to spend some time learning, I highly recommend McMillions "Options as a strategic investment". Its something like 1,000 pages. Read that and you'll really level up. (Options allow you to dial up, or down, risk as much as you wish. But they do take some focus and thinking. But they're not hard. You don't need to read the whole book, but if you do, you'll have passed a hurdle that says its time to spend some time playing with a paper account for about 6 months, then after that, you can start working with real money. You don't want to jump into options uninformed and full of confidence.)

BTW, you said you "don't play the stock game", and that's fine... you're making a valid point about the difficulty (impossibility?) of timing, and I wanted to respond to that for those who have an interest in playing the "game".

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nirvanaMar 2012

Consider options spreads. A spread is where you buy a call at one price, and sell a call at another price.

The thing about options is that they are a timed contract. Come expiration date, the value of the option depends %100 on the stock price. Before the expiration date, the value of the option is the intrinsic value (how much it is in the money) plus a time premium.

Over time, this premium erodes. When stocks are very volatile, the premiums is rather high, and thus the return on the option is impacted by this premium.

With a spread, since you're buying and selling both, you lower your total cost, while still capturing the profits in the range between the two strike prices. This means you're also selling premium at the same time you're buying it, reducing the impact of volatility on your costs and returns.

For instance (this is not an endorsement of this trade, just an example) you could buy the JAN 2014 $450 CALL and sell the JAN 2014 $550 CALL.

Let's compare that to just buying the $450 call.

The 1/2014 $450 CALL is $186. (Current price is $585, so this $186 is about $130 in intrinsic value and about $50 in premium.) If you buy that you've got $18,600 at risk. (A call contract covers 100 shares.) This is a lot cheaper than buying 100 shares of Apple which would cost you $58,500.

However if you enter into the spread, you buy the $450 call for $18,600 and sell the $550 call for $126 X 100 = $12,600 costing you a total investment of $6,000. When you make that sale, you're selling about $36 in intrinsic value and collecting $90 in premium.)

Lets consider three scenarios for Options expiration in January of 2014: Apple at $400, $500, $600 & $700.

Apple at $400: Long the stock: You've invested $58,500 for 100 shares of stock that are now worth $40,000. You've lost $18,500. Buy the $450 Call: You've invested $18,600 in calls which are now worthless[1] because the stock is at $400. You've lost $18,600. Buy the $450-$550 spread: You've lost $6,000 in a spread which has expired worthless because the stock is at $400.[2] Result: The spread wins.

Apple at $500: Long the Stock: $58,500 invested in 100 shares now worth $50,000. $8,500 loss. Long $450 Call: $18,600 in calls which are now worth $50 x 100 = $5,000. $12,600 loss. $450-$550 Spread: $6,000 in a spread that is now worth $5,000 = $1,000 loss. Result: The spread wins.

Apple at $600: Long the stock: $58,500 invested, now worth $60,000 = $1,500 profit. Long the $450 call: $18,600 invested, now worth $15,000 = $3,600 loss $450-$550 spread: $6,000 invested, now worth $10,000 = $4,000 profit Result: The spread wins

Apple at $700: Long the stock: $58,500 invested, now worth $70,000 = $11,500 profit Long the $450 Call: $18,600 invested, now worth $25,000 = $6,400 profit $450-$550 spread: $6,000 invested, now worth $10,000 = $4,000 profit Result: The stock wins.

Now, there are several factors I haven't illustrated here.... the main one being returns. The spread is much, much cheaper than the others, so when it profits, by a returns basis, it does much better.

The other factor is, the likelihood of Apple being $550 in 2014 and the likelihood of it being $700 in 2014 are not the same. Generally, the lower the price you're "betting" on, the more likely things are to end in the money.

Finally, a lot more people have $6,000 to risk than $18,000 or $58,000.

Hope this is useful. I highly recommend reading McMillins "Options as a strategic investment" (not sure about the author name, very sure about the book title.)

[1] Of course if things weren't working out as you expected by the summer of 2013, you could probably have rolled over from January 2014 to January 2015 for a small fee. If one had bought Jan 2009 Calls and the 2008 crisis happened, and they decided to roll over to 2010, they probably would have preserved their investment. Options give you options, but you have to pay more attention to them than the stock. If you bought the stock in 2006 you could have forgotten about it until today and then been pleasantly surprised.

[2] Spreads can be rolled over as well, like the call option was, by entering a trade that sells your long position while simultaneously buying a long leg at a later expiration and buys your short position while simultaneously selling a short leg at a later expiration. You can enter transactions that involve four legs (or more) and have them all execute simultaneously (or not at all if they can't all execute.)

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