Title: Study Guide for Options as a Strategic Investment 5th Edition Pdf
Lawrence G. McMillan is a professional trader and the author of the bestselling Options as a Strategic Investment. He appears regularly on CNBC and Bloomberg TV, and is the recipient of the prestigious Sullivan Award due to his contribution to the growth and integrity of the US options markets. He is founder and president of McMillan Analysis Corporation.
The book looks like a giant textbook but is jammed full of great ... Buying this book was truly a homerun. The book looks like a giant textbook but is jammed full of great trading ideas. Despite the enormous size, surprisingly there is very little fluff. The author is now shy about giving his professional opinion on the effectiveness of one approach versus another on a relative sense. I highly recommend it.A four-star book but a three-star update. Several years ago my broker recommended the 4th (2002) edition of this book. I liked it so much that I bought two of McMillan's subsequent publications: McMillan on Options, Second Edition (Wiley Trading) (cited as McMillan, 2004) and Options for Volatile Markets: Managing Volatility and Protecting Against Catastrophic Risk (Bloomberg Financial) (cited as McMillan, 2011). I've learned much from McMillan's books and have given them four-star reviews; however, I am a bit disappointed in the updates to this 5th edition.Having read the 4th edition and two subsequent publications, I did not find any significantly new material in this 5th edition. About 85% of the book repeats information in the 4th and possibly earlier editions. The new material includes a chapter on mathematical applications (pages 447 - 477) and an expanded discussion of volatility (pages 767 - 947). The mathematical applications give a good overview of an option's theoretical value. If you want to learn how to calculate theoretical values, however, you should also read Options, Futures, and Other Derivatives (4th Edition) (Hull, 2011).Although new to this book, much of the information on volatility was previously published in McMillan 2004 (pages 241-568) and McMillan 2011 (pages 171 - 204). For example, Figures 41-2 (p 872) and 41-3 (p 878) in this book are identical to Figures 9.1 and 9.9 in McMillan 2011. Also, much of the volatility - related text and several of the tables in this book are similar to those in McMillan 2004 and 2011. While one might criticize McMillan for repackaging the same material in different books, on the positive side: If you buy this book, you do not need to buy the other two.I am disappointed that this 5th edition still uses hypothetical examples, rather than actual trades. While hypothetical examples are useful in explaining how to construct a position or to illustrate a position's sensitivity to individual variables (i.e., the Greeks: delta, gamma, vega and theta), they often do not give one a practical sense of whether the trade would be profitable or even feasible. Moreover, the hypothetical examples are mathematically rigged to give simple outcomes that do not occur in real trades.Throughout the book McMillan advises his readers to construct option positions that are insensitive or "delta-neutral" to changes in the price of the underlying stock (e.g. Chapters 6, 11, 12 and 13). In his example of a neutral calendar spread (page 215) he buys 7 April 45 calls and sells 8 July 45 calls. The ratio of calls bought to calls sold was calculated from an unrealistic delta ratio of .7/.8. Actual delta values are expressed to at least four decimal places. A neutral position based on deltas rounded to the nearest tenth would be far from neutral.Chapter 40 explains how to create a position that is neutral with respect to both gamma and delta and would profit at a specific rate (vega) if implied volatility increases or decreases (pages 835 - 836). Theoretically, such a position would be insensitive to changes in the stock's price but would profit with changes in implied volatility (IV). The example trade sells volatility; i.e. it would profit by $238.00 for every 1% drop in IV. To construct such a position for the hypothetical "XYZ" stock, one must buy 100 April 50 calls, sell 173 April 60 calls and short 1,759 shares of XYZ stock. In my opinion, this is an extremely large position just for the sake of making a profit when implied volatility drops.I constructed two delta / gamma neutral spreads in a simulated account using the same math and methods that McMillan used in his example. One spread on Apple Computer (AAPL) would profit if implied volatility drops, and another spread on General Electric (GE) would profit if implied volatility rises. Unlike McMillan's example, the only way I could come close to achieving a delta / gamma neutral position was to specify a more modest return from vega e.g. -100.00 < position vega < 100.00. The position vega in McMillan's example is 278.00. Like McMillan's example, these were extraordinarily large positions; so large that the 500,000.00 cash balance in my simulated account did not provide sufficient margin to execute either trade. If anyone wants to see the specifics of these simulated trades, leave a comment or send me an email.McMillan 2004 (page 505) includes a similar example of a huge position (555 contracts) that is delta/gamma neutral with limited vega risk. Later (page 516) McMillan concedes that this is a "theoretical example", but in this book, McMillan appears to be advising his readers to actually make these large trades. I wonder who he had in mind? Perhaps the London Whale made these types of trades until Jamie Dimon fired him.The book exaggerates the potential profits and low cost of adding a collar to a long stock position. According to Table 17-3 (page 264), a collar made by the sale of 2 ½ year out-of-the-money (OTM) calls and the purchase of 2 ½ year at-the-money (ATM) puts allows a 30% - 70% profit with a small risk. The text states, "Thus one should consider using 2.5 year LEAPS options when he establishes a collar because the striking price of OTM calls (that are sold) can cover the costs of ATM puts." I checked the price of adding a 2 ½ year collar to NKE, IBM, JPM and AAPL and found that the sale of any OTM call would not cover the cost of an ATM put. To break even, one would have to sell at least two calls for every put purchased. Note that in "Options for Volatile Markets" (McMillan 2011) McMillan recommends a different collar strategy: buy six-month puts and sell one month calls with strike prices approximately 2% OTM (page 149).I stumbled on a few errors that while insignificant, should not exist after six editions:* The text states, "Figure 37-8 shows just two cases - implied volatility of 30% and implied volatility of 80%." (page 731) The two curves in Figure 37-8 are both labeled IV = 30%.* The short "240 January 70 calls" (p 841) should have a negative delta, gamma and vega, and a positive theta.* The text states, "Since 1986, long-term and short-term capital gains rates have been equal." (page 953). As long as I can remember, tax rates on long-term capital gains has been lower than on short-term. For tax year 2013 the maximum long-term rate is 15% and the maximum short-term rate is 35%.This long review focuses on a very small portion of this very long book. Generally, this is a good book and it is reasonably-priced. Just keep in mind that the book is not perfect and contains information that was previously published.Probably the most valuable book on options strategies on the market, today. Probably the most valuable book on options strategies on the market, today. McMillan keeps the book updated to keep track of changes in the market, for example, the change from fractional prices to decimal. Definitely a good resource for trading options!
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