Book Review: The Intelligent Option Investor

 | Sep 15, 2014 05:09AM ET

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 Buffett's Alpha ," found that “a significant proportion of Buffett’s legendary returns can be attributed to finding firms that have low valuation risk and investing in them using a leverage ratio of roughly 1.8. The leverage comes from the float from his insurance companies.” (p. 185)
 
Although The Intelligent Option Investor is not the first book an aspiring option investor should turn to, it is a worthy complement to some of the classic options texts.

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Written By: Brenda Jubin

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