Introduction

You can expect some frustration reading the first part of the book. Leaving aside the spelling errors and other editorial deficiencies, this part of the book is full of repetitions and could have been organized better.

Stocks And Timeframe

The advantage of selecting fundamentally sound stocks is to ensure that stock will appreciate over time. It may sound disappointing that these techniques would require to hold stocks for 2-3 years (for tax consideration) but looking at my portfolio I see only stocks I’ve held for many years and I wish I could have applied these techniques earlier. Because fundamental performance needs to be evaluated only so often, e.g. after earnings reports or other announcements, it leaves a lot of time to dedicate solely to the analysis of option strategies.

The author does present a simple method for selecting such stock and it should be have been at the start of the book, not the end.

Strategy 1 – Taking Profits Without Selling Stock

The first strategy proposes an alternative to selling stock in order to take profits on a stock that has appreciated and is currently overbought. This consists in selling covered calls and/or at the same time buying puts to insure all or some of the stock from a decline.

Mr. Thomsett reuses this strategy with different parameters (a form of a zero-cost collar) as a means to exit a position when its fundamentals change which I also recommend as a means of initiating positions in stock.

Strategy 2 – Alternative to Buying Stock – Selling Puts and Buying Calls

The second strategy provides a set of possible actions with a stock that is currently depressed and presents a buying opportunity. As alternatives to simply buying more stock on the dip, the author proposes the writing of naked puts as a means of acquiring more of the stock currently owned. Alternatively, he recommends buying calls in the case when it is uncertain whether the stock is merely dipping or is beginning a bear market.

In this context when the stock falls below the overall cost-basis the author proposes a number of rescue strategies to convert the paper loss to break-even or even a paper gain.

The book also gives enough consideration to the call backspread and calendar spread strategies, which I am going to try next.

Strategy 3 – Combinations

In the latter part of the book the author presents a number of combination techniques, such as modified short straddles, which seem to be the author’s favorites. The continued premise is that all trades are based on conservative considerations.

These strategies propose a higher return but induce higher risk, which can be mitigated with careful timing and selection of entries.

Overall, each of the above strategies is explained in detail and each outcome is thoroughly considered. The rate of return for each strategy is annualized and the author constantly reminds you of the tax consideration for each strategy.

Applying the strategies in this book helped me get comfortable with options and want to research more. I soon found out that volatility is of such great importance to option pricing that it may affect all other considerations. For example, volatility can skew the effect of time decay a great deal and cause options to keep a lot of time value until the last two to three months before expiration. You should consider LEAPS only after having successfully applied intermediate-term strategies. Suppose you write a covered LEAPS call and then the stock drops and you change your mind about keeping it. Because the call is so far away, it won’t depreciate as much as the stock and thus may prevent you from exiting the position profitably.

Rating: 4 / 5

We have all heard that high risk means the potential for high return. The problem is the high risk part. The author claims that by increasing your knowledge you can limit the risk and leave the majority of the losses to the inexperienced and uninformed. This book gives the reader a limited number of strategies appropriate for conservative investors that are looking to limit risk while expanding investment choices. Overall the book was well written and easy to understand. I do not know if I am going to jump into options trading, but if you are looking at new investment options, this author explains this asset class and gives the reader a nice set of strategies.
Rating: 5 / 5

They are not adverse to risk; they just seek to control it. In short, they seek to

1. Preserve spending power after both inflation and taxes.

2. Seek to avoid unacceptable market, liquidity and diversification risks.

3. Protect profits without loss of invested positions.

If you fit this investment profile, then Michel C. Thomsett has written this book for you. In it he demonstrates how carefully selected options strategies can help you consistently improve your returns without adding additional portfolio risk. Options, he argues, do not have to be exotic, high risk or complicated. In fact, they can be employed as a powerful tool to reduce risk.

He wisely sets his ground rules early in the book. They are:

1. Limit options activity to stocks you have pre-qualified.

2. Have faith the market with rise over time.

3. Accept the value of fundamental analysis.

4. If trade down, be prepared to add to your position.

5. Believe there are an adequate number of stocks which will meet your investment standards.

Thomsett’s book is well-written and illustrated – even if you are not familiar with options. In 255 pages he covers options strategies suitable for conservative investors. He includes covered call writing, contingent purchase strategies, rescue strategies to use when markets fall and combination strategies that produce cash to bolster current income.

If conservative and moderate investors remain true to their goals, options are a wonderful tool. However, Thomsett is experienced enough to acknowledge that deep in the heart of every market hedger is a speculator eager to spread his or her wings.

Stick with the author’s ground rules and you will avoid the market’s playground of temptations.

Rating: 5 / 5

The book doesn’t of course tell you how get rich quick (otherwise it would not be a good book). But it tells you how to take advantage of market conditions without adding risk to your stock portfolio (with the exception of the risk of lost optortunity). The book uses actual excamples (using closing prices of October 2004) and walks you through most of the scenarios with real option/stock prices, which is a great feature.

The only negative I have with this book, is, as my review title states, that he keeps repeating himself to the point, that it really gets annoying. He probably mentions 20 times that, in a conservative way, you should only consider options of a stock that you consider good long term investments. That is a valid point, and one of the assumtions for the entire book. But it would have been enought repeating it maybe 3 – 5 times.

There are numerous examples of repetition and sometimes I wonder if he wrote the book in a rush without reading the preceeding chapters. There are a lot of sub-chapters, which are sometimes just pure repetition of other sub-chapters in another chapter.

There is one scenario which I wish he would have walked through with actual stock prices. The scenarios of rolling up/forward. Since from my (theoretical) understanding, it is very difficult on a net credit basis. But I’ll try that out for real, and then I’m sure I will figure it out.

Anyway, I still give this book 5 stars, because the strategies described in this book are invaluable for any serious investor and I can’t wait until my broker finally approves me for option trading and I can try these strategies in the real world. I wish I had had that knowledge a couple of years ago, when I was holding some stocks, which had a huge runup, but I didn’t want to sell them, because I wanted to keep them for the long run. Now I would know what my “options” are of protecting paper profits.

Rating: 5 / 5