Book Review: The Intelligent Option Investor

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Just when I thought there wasn’t room for another book on options for the beginning to intermediate retail trader/investor, along came a text to prove me wrong–Erik Kobayashi-Solomon’s The Intelligent Option Investor: Applying Value Investing to the World of Options (McGraw-Hill, 2015). It’s not just that the author sets out to blend clashing cultures but that he looks at options from a fresh, albeit sometimes controversial perspective.

Value investors are known to be patient, to hold onto their positions for long stretches of time as price catches up to value—or so they hope. Options traders, by contrast, always have to keep one eye on the calendar, perhaps even on the clock. Value investors who decide to include options in their portfolios eschew short-dated options; they tend to look a couple of years out. And they embrace directionality—no iron condors for them. As the author contends, “flexibility without directionality is a sucker’s game. … Winning this sort of bet is no better than going to Atlantic City and betting that the marble on the roulette wheel will land on red—completely random and with only about a 50 percent chance of success.” (p. 28) At this point short-term probability traders would most likely throw the book across the room (or stop reading this post). But that would be rash; even they can find useful information in this book.

The author’s theoretical probability cones, creatable with a few plug-in numbers on his subscription website, extend indefinitely into the future. The value investor can then overlay his rational valuation range for a particular stock on its Black-Scholes-Merton probability cone and look for discrepancies.

Kobayashi-Solomon uses probability cones to describe basic option positions as well as to explain how input variables to the Black-Scholes model affect the prospect of profits on options trades. For instance, a trader who buys short-dated calls at 55 on a $50 stock has “a little corner of the call option’s range of exposure within the BSM cone, but not much.” (p. 68)

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The Intelligent Option Investor- Description

The  Intelligent Option Investor

The Intelligent Option Investor: Applying Value Investing to the World of Options by Erik Kobayashi-Solomon

How To Use Your Human Advantage To Outperform Algorithms In The Options Market

If 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 sophistication to 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 made by you, a thoughtful human being armed with the insight The Intelligent Option Investor offers.

Everything you need to make options a powerful contributor 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 stock

A proven way to envision the risk/reward trade-off for stocks and options and a straightforward method to use the flexibility and directionality of options to tilt the risk/return balance in your favor

A robust and intuitive framework for assessing the value of a company

Strategies to avoid the most common behavioral pitfalls

Tips for using the information on an option-pricing screen

Thorough 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 Intelligent Option Investor.

The Intelligent Option Investor is the hands-on guide to using a cutting edge 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 time honored 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 on options that teaches this fruitful, combined approach. And that’s why it works.” — JEFF FISCHER, advisor, Motley Fool Options

About the Author

Erik Kobayashi-Solomon is the founder and principal of IOI, LLC and the Director of Research for YCharts, Inc. Previously, he served as Morningstar’s Market Strategist and as co-editor of the Morningstar Option Investor newsletter. In addition to publishing well-received sector and stock-specific reports for YCharts’ individual and institutional clients, Erik has been sought out by a wide range of institutional investors–from the World Bank to value-oriented hedge funds–for his expertise in corporate valuation, option investing strategies, and risk control issues.

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