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A Few Notes on Put Option Strategies for Smarter Trading

| | Posted in: Equity Options

In his 2010 book Put Option Strategies for Smarter Trading: How to Protect and Build Capital in Turbulent Markets, author Michael Thomsett “explains all the put-based strategies [for individual stocks] in detail and shows how even a troubled market presents great opportunities to keep you in control. The worst aspect of volatile markets is a sense of not having control over events, and puts can be used to offset this apprehension. You have probably heard that astute traders can earn profits in all types of markets. Puts are among the best devices to accomplish that goal.” Some notable points about the book are:

The book might best be characterized as a reasonably robust presentation of how options on individual stocks work, with focus on put options. In other words, the book targets individuals who are unfamiliar with options and associated strategies.

The book addresses how to generate profits with options only conditionally, assuming that investors/traders can predict price behavior of the underlying stocks with economically meaningful reliability. While summarizing some methods used to predict stock price behavior, the book does not provide evidence that the methods work via analysis or citation. The book provides no descriptions or analyses of the performance of traders who have actually implemented the strategies described. Sophisticated option traders will probably not benefit from reading the book.

The discussion and examples in the book underplay the obstacle of the substantial trading frictions borne by traders of options. The term “transaction costs” appears only three times in the book. The term “bid-ask spread” does not appear in the book.

Analysis of the outcomes for actual options trading is complex and bounded by a paucity of historical trading data compared to that available for stocks and bonds. However, there are some formal studies that attempt to model expectations for some options strategies based on available historical data. The book does not describe or reference such research.

In summary, investors may find Put Option Strategies for Smarter Trading useful as a source of information on how put option strategies work, but they should be skeptical that any examples it presents on strategy profitability are reliably achievable in actual trading.

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